GAP - Sida
DEVFIN ADVISERS
INNOVATIVE FINANCE
Gap analysis
REPORT TO SIDA
June 2014
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Content
2 DEFINING AND STRUCTURING INNOVATIVE FINANCE ..................................... 4
3.3 Private-public development partnerships .................................................... 16
Global Health Investment Fund (GHIF) .................................................. 31
Pledge Guarantee for Health (PGH) ....................................................... 32
African Risk Capacity Initiative (ARC)..................................................... 33
4 INNOVATIVE FINANCE INTERNATIONALLY ...................................................... 34
5 STRATEGIC ALLIANCES IN INNOVATIVE FINANCING...................................... 37
5.3 Potential partnerships ......................... Ошибка! Закладка не определена.
6 CHALLENGES FOR SIDA IN INNOVATIVE FINANCE ......................................... 42
6.2 Challenges within Sida’s results strategies ................................................. 46
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ANNEX 2: DETAILS OF THE SIDA INNOVATIVE FINANCE CASES ............................ 52
ANNEX 3: SOME ASPECTS OF INNOVATIVE FINANCE INTERNATIONALLY ........... 59
ANNEX 4: A COMPARISON BETWEEN THE CONCESSIONARY CREDITS AND THE
CURRENT LOANS AND GUARANTEES .............................................................. 72
ANNEX 5: DEVELOPMENT OF LOCAL CAPITAL MARKETS ...................................... 73
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EXECUTIVE SUMMARY
Objective and approach : The purpose of this report is to provide Sida with a structured overview from which it can further expand and streamline innovative forms of finance in development cooperation. Two main drivers contribute to growing demand for innovative approaches to financing development. First, there is international recognition that global development needs cannot be met by traditional Official Development Assistance (ODA) alone, but must be supplemented with private and commercial capital. Funds also need to be deployed as efficiently as possible, motivating innovative mechanisms and design of development activities. Second, Sida is increasingly measured by its results, not its activities, approaches, and disbursements. Growing attention to results is mirrored by larger flexibility in approaches, with substantial room for new and innovative finance.
This report provides an overall definition of innovative finance as well as classifications and parameters to help analyse and understand different forms of innovative finance. It draws extensively from international discourse as well as interviews with Sida staff and development practitioners in international development agencies. The study further maps and discusses Sida’s experiences to date as well as opportunities and challenges going forward both with respect to Sida internally and in Sida’s relations to her international partners.
Definition and typology : Innovative finance describes mechanisms that leverage or deploy funds in new ways for development purposes. The Sida definition is that
“
Innovative finance aims at mobilizing private capital resources – both market-based and philanthropic – for development through new forms of financial solutions”. The report also presents relevant parameters and possible classifications within these definitions.
Innovative finance can be understood in terms of the needs it addresses, the stage in a project’s lifecycle where it intervenes, and the instrument it deploys. The main classification variable in this review is by type of instrument. Similar instruments can be used across sectors and countries.
Sida’s experience in innovative finance : The study maps Sida’s experiences in seven categories of instruments and assesses them against six parameters to describe their main features of innovation. Sida’s most employed instrument in innovative finance is its independent guarantee scheme, included in Sida’s instruments in the late 1990s and made a permanent feature in 2009. Its first guarantee of this nature was issued to a telecom company in Uganda, allowing the company to roll out a rural mobile network. It was also the first corporate bond in the country. What was seen a high risk commercial venture, became a success not only for the telecommunication company, increased the availability of mobile phones in rural areas for the poor, but also for Sida as the guarantee expired without cost to the Swedish tax payers. The underlying transactions for which Sida has issued guarantees, have performed well to date without incurring any substantial losses. In fact they have created a net revenue stream to the Swedish government from the risk-based premiums paid by the organisations provided a guarantee. Guarantees are potentially an extremely cost-effective form of development assistance, assuming that the risks are well managed. In an international perspective, the Sida guarantee instrument is still a largely unique instrument due to its flexibility and versatility in application. This instrument has made Sida an attractive partner for development agencies and philanthropic foundations as a complement to their efforts in innovative finance. For example, USAID, which has a long
ii history of providing similar guarantees, signed in 2010 a Memorandum of Understanding with Sida for large-scale cooperation. Since then a number of co-signed guarantees have been implemented. A renewed MoU for an expanded cooperation was signed in 2013. The
Sida guarantee instrument has also been a key reason for the close collaboration with the
Bill and Melinda Gates Foundation in the health sector since 2010. In recent years Sida has expanded its guarantee portfolio in different directions including advance market commitments, first-loss guarantees and reinsurance.
Sida and the Swedish government also engage in other forms of innovative finance, inter alia challenge funds, private-public partnerships, and results based financing, particularly output-based aid. Sida was one of the pioneering donors in the Private Infrastructure
Development Group (PIDG) in the early 2000s. Under PIDG a series of facilities to promote private investments in infrastructure especially in Sub-Saharan Africa have been established. PIDG has demonstrated ability to leverage considerable amounts of private financing for investments in energy and other infrastructure in order to increase the access of such services to poor people in the poorest nations of the world. In the initial stage, Sida influenced PIDG, through the GuarantCo facility, to be an instrument for local capital market development in addition to infrastructure development.
Challenge funds have proven effective in mobilising commercial enterprises and other entities over the world for selected high priority ventures in development countries. These funds have been applied in a variety of ways such as to promote innovations for the
Bottom of the Pyramid, in agro-business and energy in Africa, for water innovations, in business development in conflict countries, for peace initiatives, for democratic development, and mobilising diasporas for investments in their home countries. Sida is both developing challenge funds on its own and collaborating with others in such ventures, for example with USAID in its grand challenge funds.
In addition, Sida has been operating a Public-Private Development Partnership program
(PPDP) for a few years in which Sida and larger companies cooperate and co-finance development projects of relevance to both Sida and the company’s partners. This is taking place in vocation training, human rights, teaching coffee producers to adapt their farming techniques against climate change and so on. The program, which is open to companies from anywhere in the world, has been essential to engage Swedish multinationals such as
H&M, Scania, Tetra Laval and Volvo in a positive and constructive dialogue, taking the companies’ Corporate Social Responsibilities to new levels. The PPDPs assume three party collaborations, for example with NGOs, government entities or UN agencies as implementing agencies, thus avoiding subsidizing the commercial companies and rather leveraging ODA funds with private capital.
Main strengths : Sida’s strengths in innovative finance are an overall culture of pioneering, a positive attitude in the government for innovation and a flexible, responsive and often informal dialogue between the Ministry of Foreign Affairs and Sida, allowing for experimenting with new approaches. In general, the flexibility and the versatility of the innovative financing instruments used by Sida are considerable, making them useful tools in the Government’s new results-strategies. To date, innovative finance has been most typically deployed in areas that require public and private sector entities to work together, such as energy and environment, infrastructure, business development, agriculture and, most importantly, health. Yet emerging experiences and opportunities also exist in thematic areas such as democracy, human rights, peace, security and education.
Challenges going forward : Challenges include maintaining and promoting a pioneering culture, combined with sufficient perseverance and patience to let ideas be tested,
iii readjusted, and mature. Sida also needs to find the right balance between partnering with international leading agencies on the one hand, and cultivating its own initiatives on the other. The latter is important to build and retain crucial competence and experience over time. Narrowing the distance between specialization in innovative instruments at the center and operational responsibility and funding allocations at the embassy level is also an important challenge. Moreover, the study observes missed opportunities for fruitful synergies between Sida and Swedfund. In many countries, innovative and effective solutions emerge in the nexus between donor agency and Development Finance Institutions
(DFIs). Finally, Swedish authorities need to stay alert to adequate capital reserves and risk weighted pricing of its guarantee instruments.
Going forward, the report also recommends looking further into international experiences and exploring additional partnerships, at home and internationally.
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LIST OF ACRONYMS
CAFEF
CC
CDC
CF
DAC
Danida
DCA
DFID
DFI
DGIS
DIB
EAIF
EIB
EKN
ESG
FDI
FMO
GAP
GAVI
GET FiT
AACF
ADB
AECF
AfDB
AGF
AMC
ARC
ATI
AusAID
BiH
BITS
BMGF
BMZ
BOT
GHIF
GIZ
GPOBA
IAP
ICT
IDA
IFAD
IFC
IFFIm
IFI
KFW
L&G
MAVC
African Agricultural Capital Fund
Asian Development Bank
Africa Enterprise Challenge Fund
African Development Bank
Africa Guarantee Fund
Advance Market Commitment
The Africa Risk Capacity (Initiative)
Africa Trade Insurance Agency
Australian Agency for International Development
Bosnia Herzegovina
Board of Technical and Economic Cooperation (of Sweden)
Bill and Melinda Gates Foundation
German Development Ministry
Build Operate Transfer
Conflict Affected and Fragile Economies Facility
Concessionary Credits
Commonwealth Development Corporation
Challenge Fund
Development Assistance Committee (of OECD)
Danish International Development Agency
Development Credit Authority (of USAID)
Department for International Development (of the United Kingdom)
Development Finance Institution
Directorate-General for International Cooperation (of the Netherlands)
Development Impact Bond
Emerging Africa Infrastructure Fund
European Investment Bank
Swedish Export Credits Guarantee Agency
Environment, Social and Governance
Foreign Direct Investment
The Dutch Development Bank
Green Africa Power
Global Alliance for Vaccines and Immunization
Global Energy Transfer-in Tariff
Global Health Insurance Fund
German Agency for International Cooperation
Global Partnership of Output-Based Aid
Innovations Against Poverty
Information and Communications Technology
International Development Association
International Fund for Agriculture Development
International Finance Corporation
International Facility for Immunisation
International Finance Institution
Kreditanstalt fuer Wiederaufbau (the German Development Bank)
Loans and Guarantees
Making All Voices Count
MDB
MDG
MIGA
MOU
Nefco
NIB
OBA
ODA
OECD
PGH
PIDG
PPDP
PPP
PSI
R&D
RBF
SECO
SEK
SME
SPV
SDR
SSA
ToR
WEF v
Multilateral Development Bank
Millenium Development Goals
Multilateral Investment Guarantee Agency
Memorandum of Understanding
Nordic Environment Finance Corporation
Nordic Investment Bank
Output-Based Aid
Official Development Assistance
Organization for Economic Cooperation and Development
Pledge Guarantee for Health
Private Infrastructure Development Group
Public-Private Development Partnership
Public-Private Partnership
Private Sector Investment
Research and Development
Results-based financing
State Secretariat for Economic Affairs (of Switzerland)
Swedish Export Credit Corporation
Small and Medium-sized Enterprise
Special Purpose Vehicle
Special Drawing Rights
Sub-Saharan Africa
Terms of Reference
World Economic Forum
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1 INTRODUCTION
Innovative finance is an increasingly broad term used to describe new ways of funding development; both leveraging funds and putting them to good use. The purpose of this report is to provide Sida with a structured overview from which it can further expand and streamline innovative forms of finance in development cooperation. Annex 1 provides the Terms of
Reference.
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This chapter presents the rationale and objective of the report. It also summarizes the historical background from an international perspective as well as setting out the context for Sida that constitutes the rationale for exploring innovative finance in more detail.
1.1 BACKGROUND
In 2002, the UN International Conference on Financing for Development in Monterrey coined the term Innovative Finance . The concept emerged from a rising concern over how to fill the gap between the investments required to achieve the Millennium Development
Goals (MDGs) on the one hand and what can realistically be mobilised through Official
Development Assistance (ODA) and other public funds on the other. Thus, innovative finance would generate funds additional to ODA for development purposes.
In 2006, at the Paris Conference on Innovative Sources for Financing of Development, 44 countries, various international organisations, private foundations and civil society representatives formed the Leading Group for Innovative Financing of Development . Its purpose has been to share experiences on different models of innovative financing, especially mechanisms such as global taxes. The group has expanded to 67 countries today
(Sweden is not part of the group). In 2011, the Busan High Level Forum Declaration asked for a renewed and more systematic attempt to put private capital flows, investments and innovative financing mechanisms to work for development together with ODA. In addition, the UN, the World Bank Group, the OECD and other multilateral organisations have played leading roles over the last decade in discussing what innovative financing is and how it to promote it.
2
As the international development community is preparing for the post-2015 Development
Framework Agenda, the issue of additional funds for financing development is likely to be further reinforced. While considerable achievements have been made towards some of the
MDGs, new development issues have emerged requiring large capital investments, such as dealing with climate change.
1.2 SWEDISH POLICY CONTEXT
Three specific Swedish Government instructions and policies provide further context for the review:
1 This review is, according to the ToR, the first of two phases. In the second phase, Sida will further elaborate on selected topics, prioritizing and operationalizing its strategies and approaches to innovative financing.
2 See, for example UNDP (2012): Innovative Financing for Development: A New Model for Development Finance ?
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First, in July 2013, the Swedish Government introduced a new model for result-strategies that would govern the development cooperation with Sida’s partner countries, the multilateral organisations and for thematic areas.
3
The guiding principles are that Swedish
ODA shall be innovative, results-based, cost-effective, and provided with a long-term perspective. A lead theme is that the results-strategies should have a stronger focus on defining concrete results for Sweden’s ODA and measuring the achievements of such results. These results should also be focused on thematic areas, rather than conventional sectors.
Second, in December 2013, the Swedish Government instructed Sida to present the organisation’s activities concerning the development of innovative financial mechanisms.
This should include an analysis of the opportunities for Sida to increase the use of modalities such as loans and guarantees, challenge funds, funds and direct investments, as well as new combinations of instruments and actors. Sida should also explain how the organisation can use innovative financing and development modalities more effectively, as well as how it can cooperate with other relevant actors in this field such as Swedfund.
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This review is underway and the present report is a contribution.
Third, in March 2014, the government proposed a new Development Assistance Platform, that will govern the policies and strategies for Swedish ODA and in which the resultsorientation was emphasized and the development objectives further elaborated as indicated in the figure below:
Figure 1: The Swedish development assistance platform
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3
Ministry of Foreign Affairs: Guidelines for Results-strategies in Swedish Development Assistance 2013.07.11
4 Ministry of Foreign Affairs: Instruction to Sida for 2014 . Government Decision 2013.12.19
5 Inofficial translation from Swedish
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Together, these directions provide a strengthened rationale for deploying innovative financing mechanisms in Sida and in partnership with other agencies. A stronger emphasis on Sida’s results relative to its activities can be interpreted as more flexibility on the latter.
In other words, as long as progress is made on results, Sida can design, use, and package various instruments with significant versatility and flexibility.
1.3 STRUCTURE OF THE REPORT
The report consists of seven chapters structured as follows:
Chapter 2 presents evolving definitions of innovative finance and proposes a working definition for Sida, as well as a classification of mechanisms in light of various international typologies
Chapter 3 discusses Sida’s experiences in innovative finance and presents examples including selected in-depth case studies
Chapter 4 presents the international experience and selected international cases
Chapter 5 presents international agencies that are current or potential partners to Sida in innovative finance
Chapter 6 discusses challenges to Sida in scaling up and expanding its innovative finance portfolio
Chapter 7 proposes topics for further analysis in phase two.
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2 DEFINING AND STRUCTURING INNOVATIVE
FINANCE
This chapter reviews international definitions and presents the Sida definition of innovative finance. The chapter also presents relevant parameters and possible classifications within these definitions.
2.1 DEFININING INNOVATIVE FINANCE
Innovative financing covers a broad range of approaches and includes diverse forms such as thematic global trust funds, public guarantees and insurance mechanisms, equity investments, growth-indexed bonds, countercyclical loans, distribution schemes for global environmental services, microfinance and meso finance, and so on.
6 While innovative finance initially was associated with the means of attracting additional funds to ODA for development, the term has been expanded to capture ways of providing more effective development assistance by engaging new actors with different skill sets and using various forms of market-mechanisms, sometimes referred to as ‘smarter aid’. This means that innovative finance encompasses both new and more efficient ways of sourcing funds and new ways of deploying them.
There is no commonly agreed definition of innovative finance in the donor community.
Different organisations have put forward their own understanding and use of the term. Four examples, summarized in Table 1, illustrate the range of prevailing definitions and interpretations.
Table 1: Examples of innovative finance definitions
Institution Year Definition
World
Bank
World
Bank
OECD
2009 Innovative financing involves non-traditional applications of solidarity, PPPs, and catalytic mechanisms that support fund-raising by tapping new sources and engaging investors beyond the financial dimension of transactions, as partners and stakeholders in development or deliver financial solutions to development problems on the ground.
2013
Generate additional development funds by tapping new funding sources (that is, by looking beyond conventional mechanisms such as budget outlays from established donors and bonds from traditional international financial institutions) or by engaging new partners (such as emerging donors and actors in the private sector);
Enhance the efficiency of financial flows, by reducing delivery time and/or costs, especially for emergency needs and in crisis situations; and
Make financial flows more results-oriented , by explicitly linking funding flows to measurable performance on the ground.
2010 Suggesting innovative financing as a means of raising funds or stimulating actions in support of international development that go beyond traditional spending approaches by either the official or private sectors, such as:
new approaches for pooling private and public revenue streams to scale up or develop activities for the benefit of partner countries;
new revenue streams ( e.g. a new tax, charge, fee, bond raising, sale proceed or
6 United Nations (2009), Report of the Commission of Experts of the President of the United Nations General Assembly on Reforms of the International Monetary and Financial System
5 voluntary contribution scheme) earmarked to developmental activities on a multiyear basis;
new incentives (financial guarantees, corporate social responsibility or other rewards or recognition) to address market failures or scale up ongoing developmental activities.
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United
Nations
2011 To be effective, mechanisms should aim to mobilize resources that are stable and predictable, should supplement and not be a substitute for traditional sources of financing, should be disbursed in accordance with the priorities of developing countries and should not unduly burden such countries.
Figure 2 illustrates the different elements that comprise the concept of innovative finance, where innovative finance can take place in either circle or in the intersection between the two.
Figure 2: Different definitions of what Innovative finance include
Innovative finance is also a relative term in time and across agencies. Some previously
“innovative” financing mechanisms created 10-15 years ago are now part of the standard development financing landscape and are no longer innovative. Successful new mechanisms used today are also likely to become traditional instruments to fund development. In addition, what is innovative in one institution may be standard practice in another. The process, perception and list of innovation financing mechanisms are dynamic in nature.
Sida currently operates with a definition of innovative finance presented below. Following the discussion on the draft report, Sida found that there is no reason to alter their definition.
Consequently, it constitutes the starting point for this report and its analysis.
Box 1: Sida's definition of innovative finance
Innovative finance aims at mobilizing private capital resources – both market-based and philanthropic – for development through new forms of financial solutions. Financing solutions may involve the use of development loan and guarantee arrangements.
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7 Sandor, Scott and Benn: Innovative Finance to Fund Development: Progress and Prospects (OECD Brief 2009)
8 Sida’s current website www.sida.se
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2.2 DIFFERENT WAYS TO CLASSIFY INNOVATIVE FINANCE
Within the above definition of innovative finance, it is useful to establish certain parameters for assessing different forms of innovative finance. Approaches to innovative finance vary by how funds are mobilised, what they are used for, and how they are used, among other things. For example, the UNDP has suggested four broad categories of the development of innovative finance:
1.
Taxes, dues or other obligatory charges on globalized activities: this includes initiatives such as the airline ticket tax which is levied at the national level but within a framework of international coordination. The revenues raised are allocated to international development. Proposals for a financial transactions tax and carbon taxes are also examples that fit into this category. These initiatives generate new public revenue streams for development from the private sector.
2.
Voluntary solidarity contributions: under such initiatives, consumers are given the option to donate a small sum to international development at the point of product purchase (e.g. an on-line hotel reservation). Although private in nature, public authorities facilitate such contributions through tax incentives and technical facilitation in the distribution of resources. Examples include Product (RED) and the Global Digital Solidarity Fund.
3.
Frontloading and debt-based instruments: an initiative which ‘frontloads’ resources to make public funds available earlier for development. It does this via the issuance of bonds on international capital markets. The International Finance
Facility for Immunization (IFFIm) is one example. Mechanisms which ‘frontload’ public resources for development generate liabilities that are reportable as aid in several years’ time, i.e. when the liabilities fall due. Other debt-based mechanisms include debt conversions (which reduce the amount of debt and debt service payable thereby freeing-up additional resources for development expenditures), diaspora bonds (a debt instrument—issued by a country, a sub-sovereign entity or a private corporation—to raise financing from its overseas diaspora) and socially responsible or ‘green’ bonds (bonds which target investors who wish to invest in development or environment initiatives and so may accept lower rates of return).
4.
State guarantees, public-private incentives, insurance and other market-based mechanisms: this includes initiatives which leverage public funds to create investment incentives for the private sector, for instance through state subsidies or commitments to purchase a particular product at a set price (e.g. a vaccine). In so doing, these initiatives aim to correct market failures. Other mechanisms aim to reduce sovereign risk and/or macroeconomic vulnerabilities, such as weather-based insurance or counter-cyclical loans (i.e. they aim to improve the effectiveness of finance rather than create new revenue streams for development).
Figure 3 summarizes the four categories and their main characteristics.
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Figure 3: Four categories of innovative finance
Source: UNDP. Interpreted and elaborated by Devfin
The above categories are broad and encompass both different ways of mobilizing and using funds. Within each category a wide range of specific tools are possible. As illustrated, only the latter two are of interest to Sida. The first category encompasses taxes and other obligatory charges that are outside the prerogative of the Swedish government.
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In terms of the second category, voluntary contributions, Sida might encourage such initiatives, but they exclude by definition ODA, hence this is not part of Sida’s work.
This report therefore concentrates on innovative financing within categories 3 and 4 above, where a number of approaches exist, inter alia loans, grants, insurances, grants, bonds, vouchers, advancemarket commitments or other results-based funds, as well as various forms of subsidies.
2.3 A TYPOLOGY FOR SIDA
The instruction to Sida by the Swedish Government referred to earlier has an implicit view of what is considered innovative financing. This instruction includes the terms loans and guarantees , challenge funds , funds and direct investments , as well as new combinations of instruments and actors. In preparation for the instruction to Sida, the Ministry of Foreign
Affairs reviewed the concept and identified in an unofficial paper the following categories of instruments:
Table 2: Types of instruments
Instrument
Guarantees
Development loans
Definition and use in Swedish aid
An insurance against risk, issued by a government. Applied in Swedish aid since the 1980s.
Sida is not providing loans by itself, but providing subsidies of loans issued by other financial institutions under its Development Loan facility. There is a proposal to expand this facility, allowing Sida to also issue development loans.
9 The Swedish government has not engaged in any of these initiatives and is not in general in favour of global taxes of this nature. This is also one of the reasons why Sweden has not joined the Leading Group for Innovative Financing.
Its argument against global taxes and levies is that taxes are a prerogative of national governments, and could be perceived as a way of circumventing the multilateral agreement of allocating 0,7% of GDP to ODA.
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First-loss applications
Advance market commitments
Private-Public
Partnerships
Reducing risks through a guarantee or insurance. Applied by Sweden using the guarantee instrument sometimes combined with grants since the late 1990s
Front-loading to stimulate development.. Applied by Sweden using the guarantee instrument sometimes combined with grants.
Partnerships of different kinds between ODA and private entities with joint financing.
Example: Sida’s Public-Private Development Partnership program (PPDP). Fund facilities, such as PIDG, can also be classified under this label .
A competition for grants or soft loans against set criteria among commercial or other entities.
Used by Sida since 2010.
Challenge funds
Global taxes
Emission rights
Development impact bonds
A levy on airline tickets or ICT contracts, for example. As noted earlier, Sweden is not applying this instrument, nor is the Government in favour of them.
The revenues derived from, for example, selling emission of carbon dioxide by governments can be applied partly or totally for financing aid. Sweden is not applying this instrument.
Provide upfront funding for development programs by private investors, who are remunerated by donors or host-country governments—and earn a return—if evidence shows that programs achieve pre-agreed outcomes. Not yet applied in Sweden, but subject for interest in how it could be applied.
Based on the above, the following classification by instrument will structure the discussion of Sida’s experience in Chapter 3:
1.
Guarantees (used for different risk mitigation purposes and various structures such as front-loading, insurances, first-loss applications, etc.)
2.
Development loans
3.
Public-Private Partnerships, which might include fund facilities for different purposes (see below), or specific co-financing with single private companies as in
Sida’s PPDP programme
4.
Challenge Funds
5.
Results Based Financing (RBF), principally Output-Based Aid (OBA)
6.
Private-Public multi-donor fund facilities
7.
New instruments, including direct investments and impact bonds.
In addition, the qualities of each approach vary as what it is trying to achieve. For example, some instruments are measured by their ability to leverage private capital, while others are more meaningfully assessed in terms of how well they can replicated or be scaled up in other contexts, countries or sectors. Some instruments allow for the same capital to be used over again, while others are finite in their use but their success depends on their ability to generate better and more measurable results. For the purpose of this review, we suggest six parameters as a means of assessing Sida’s innovative financing mechanisms in all the seven categories of innovative finance:
Box 2: Parameters for assessing innovative finance
Leveraging : (Swedish) ODA is leveraging other forms of funding in the sense of adding to ODA, the higher the degree of leverage, the better
Catalytic : Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering : Sida is involved in new ways of funding and financing mechanisms
Replicable : Can be scaled up to larger size or in other places
Measurable : it is possible to ex-ante define desired results, and ex-post determine to what degree such results were achieved
Recyclable capital : the re-use of the Sida guarantee reserve or that donor-contributed funds are returned to implementing entity and redeployed
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3 INNOVATIVE FINANCE IN SIDA
This chapter presents the different instruments in innovative finance listed above and how they are being applied by Sida. For each instrument, we give examples from Sida’s current portfolio, results and lessons learned, as well as challenges in scaling up the use. At the end of the chapter we provide three examples of Sida innovative finance more in detail.
3.1 GUARANTEES
Background
Sweden has offered guarantees alongside concessionary export credit since the 1980s, initially managed by the Swedish Export Credits Guarantee Board (EKN).
In 1999, the Government allowed Sida to offer guarantees catalytically and independently on a trial basis and to use the guarantee instrument as a principal aid tool. The first independent guarantee supported a local market bond issue in Uganda that funded the rollout of the mobile telephone system into the rural areas. This company (and the bond issue) was a commercial success and the operator/beneficiary repaid the bond before its maturity.
The second successful guarantee supported the financing for the Maputo harbor in
Mozambique, involving the Swedish company Skanska. While the rate of providing independent guarantees was slow, it gave rise to other innovative developments. First, it became a development priority to deepen and broaden local capital markets and support local currency transactions. Second there was an initiative to create a limited liability company, GuarantCo, with the mandate to provide local currency guarantees to cover risks in infrastructure projects.
In 2009, a new government regulation made the independent guarantees a permanent feature of Sida’s toolbox, creating a new impetus to innovate. Guarantees were increasingly integrated in the overall aid dialogue and Sida staff was encouraged to look for new solutions and test the limits of the system. Annex 4 elaborates on a comparison between the loans and guarantees provided under the Concessionary Credit scheme and the new Guarantee Scheme, showing the significant expansion in usefulness of the latter.
Summarized below are different types of independent guarantee applications:
First loss guarantees Philanthropic investors became new partners with whom to share project and financing risks. They typically have a private sector approach and prefer to structure their investments with a first loss platform to achieve high social returns in exchange for assuming substantial downside financial risks. They are willing to take the riskiest part of the capital structure, which is typically equity or quasi-equity. They use this base to attract others to less risky layers of a fund (and for which they will receive a more limited return). The investors are used to seeing
“waterfall” financing models where loan tranches are structured according to risks.
Sida guarantees that take the first-loss risk means that they have some characteristics of equity risk without the ownership responsibilities. There are several examples of first loss guarantees in Sida’s portfolio. In the Global
Microfinance Consortium Sida, for example, shares the first loss risk on a paripassu basis with the social investment arm of Deutsche Bank. This leverages in other investors with less risk appetite to participate (European Investment Bank,
KfW, the pension fund Storebrand, etc). A proxy for guarantees is placing liquid funds into an escrow account which serves as a collateral for a loan. This technique
10 has been adopted in the case of EcoEnergy in Tanzania, where a bridging finance loan will enable growers of sugar cane to have an early start and to avoid the loss of one planting season. (If a conditional loan instrument had been available it would presumably have been more advantageous for Sida and for the beneficiaries than the adopted escrow account solution – see section 3.2.)
Advance Market Commitments (AMCs) AMC models have been applied to health products where it is recognized that direct R&D funding and public-private partnerships must be complemented with efforts to build a market that provides acceptable commercial returns. The creation of such a market would move R&D on neglected diseases out of the domain of philanthropy and into commercial business models with the objective of broader innovation and sustained manufacture. Sida has joined with six other partners
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to use its guarantee instrument to create an
AMC volume guarantee mechanism with the Gates Foundation. Two pharmaceutical companies, Bayer and Merck, will manufacture and deliver longacting reversible contraceptives in volume (27 million and 13 million respectively) at prices which are far below the prices on developed markets because of the guaranteed volumes. The collective efforts of the partners also enabled better pricing than what individual donors achieved through separate negotiations.
Reinsurance Reinsurance as a guarantee mechanism is applied in situations where there are insurance or guarantee instruments in place that in turn seek reinsurance to limit their risk. Sida is actively considering entering into two different arrangements where natural disasters would cause humanitarian crises. A pan-
African contingency risk pool or African Risk Capacity (ARC) is being established under the aegis of the African Union with technical support of World Food
Program, whereby African governments will have a mechanism to rely on as an instant support in the event of severe drought. A similar index-based financing system has been suggested with the purpose to mitigate flood disasters in
Bangladesh. More traditional reinsurance would also be used for the African
Guarantee Fund , a newly established mechanism mandated to provide risk cover for SMEs in Sub-Saharan Africa.
In addition, the Africa Trade Insurance Agency
(ATI) guarantees trade transaction in Eastern Africa, including political risk and risk of breach of utility contract. ATI reinsures its guarantees in the commercial market.
Sida in an international context
Many International Finance Institutions (IFIs) provide different forms of guarantees.
However, as most guarantees products are more complex instruments than loans, they generally require more resources to structure and execute, with the possible exception of standard political risk guarantees. Consequently, their use is more limited and best fit larger scale projects. The World Bank Group provides various types of guarantees, which mitigate risk such as political and regulatory uncertainties. Their guarantee instruments are partial risk guarantees, partial credit guarantees and policy-based guarantees. To date, the
World Bank has approved 28 guarantees. MIGA provides political risk guarantees but does not cover commercial risks. Sida collaborates with MIGA in the CAFEF project, which
10 Gates Foundation, Norway, DFID, USAID, Children Investment Fund Foundation, and Clinton Investment Funds
Foundation
11 uses its standard guarantee product. The International Finance Corporation also offers partial credit and partial risk guarantees to private companies.
With the exception of USAID and Sida, no bilateral aid agency appears to have an active guarantee program. Other aid agencies can provide guarantees when requested. For example, Norway participated in the Gates Volume Guarantee , described below.
Similarly, many DFIs include guarantees as a product but they are rarely used. Guarantees only represent 2 % of the combined portfolio of the European DFIs. Swedfund has no guarantees on its books.
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In summary, Sida can rightly claim to be unique in its guarantee operations. Part of its uniqueness is the flexibility of its instrument, as illustrated in other sections of this report.
Sida’s guarantee portfolio
Sida has a portfolio of approximately twenty guarantees since the new Loan and Guarantee instrument was established in 2009. A number of these have been developed in cooperation with USAID as a strategic partner. Below are some examples of Sida guarantees which fit well within the concept of innovative finance. Some of these are already approved, while others are in the planning stage.
The Global Health Investment Fund (GHIF)
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Ongoing R&D in the health has led to numerous innovations ripe for late stage clinical trials, however funding for this last stage has been lacking. GHIF has been established to bring 10 new products through late stage trials to market. The Gates Foundation and Sida have established a ten-year guarantee facility in order to mobilise capital to support the fund. On the basis of their support,
US$108 million was raised from charitable capital sources, institutional investors, pension funds, pharmaceutical companies, DFIs and donors. A three-tranche guarantee structure covering US$ 60 million is shared by the Gates Foundation and Sida. For details, see 3.2 below.
The Pledge Guarantee for Health (PGH) has been developed to improve the financial efficiency of donor funding using commercial funds to bridge the gap between donor pledges for health and actual disbursement. PGH will finance the time period, which could be as long as six to nine months, in order to expedite the delivery of the goods or services in a timely and predictable fashion to Ministries of Health and their supported institutions.
Commercial banks will provide the financing against the donor pledges, supported by a
50% guarantee jointly granted by Sida and USAID on a pari-passu basis. By providing a stable time frame for procurement, producers are able to plan production and logistics and pass through some of the reduced costs to the recipient countries. The guarantee facility has a five-year term. For details, see 3.2 below.
A volume guarantee with Gates Foundation 13 According to UN statistics more than 200 million women and girls in developing countries have no access to affordable contraceptives while of 600 million women who use contraceptives for short time use have no access of long lasting means of preventing unwanted births. The manufacturers Bayer and Merck have access to an implant technology accepted by WHO and would be prepared to provide them on a massive scale at a reasonable price. Through a partnership of several donor agencies and philanthropic organisation and with a guarantee provided by Sida,
11 EDFI annual report 2012
12 Award winner in Financial Times/ IFC Awards in innovativ financing for development 2014
13 Runner up in Financial Times/ IFC Awards in innovativ financing for development 2014
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Norway, Gates Foundation and Children’s Investment Fund Foundation (CIFF) the prices for implants will be reduced by half.
Conflict Affected and Fragile Economies Facility (CAFEF) Fragile and conflict-affected countries have serious difficulties in attracting FDI as investors sheer away from the political risks linked to investments in the risky states. CAFEF is intended to have a catalytic effect by adding investment protection enabling investors, contractors and suppliers to enter the markets. A trust fund has been created by MIGA to provide political risk insurance and to expand their capacity to offer insurance in these countries. The trust will include three layers, in which Sida along with Canadian CIDA, DFID and MIGA share the first layer, Sida comes alone in the second layer, while MIGA and private sector take the third layer. All in all the facility is for US$ 440 million of which bilateral donors take
US$ 90 million while MIGA and reinsurers share the rest.
African Guarantee Fund (AGF), a pan-African guarantee scheme has been established by
Danida and African Development Bank and with the participation of the Spanish government. Through AGF, commercial banks and financial institutions across Sub-Sahara
Africa can get portfolio and individual loan guarantees as well as equity guarantees. The demand for AGF guarantees has been so high that the initial capital of US$ 50 million has been committed as well as its leverage potential of 1:3. DFID will most likely provide additional capital. Sida is considering a co-guarantee or counter-guarantee and thereby enabling AGF to expand its activities. Participation with Swedfund may be considered as further described below.
The African Risk Capacity (ARC) is proposed to be a pan-African insurance system, whereby a member country and its affected population suffering from serious draught would get an immediate compensation for their losses. It is based on the premise that a drought does not occur simultaneously in several countries over Africa. To date, 24 African countries have signed the establishing protocol. It has been ratified by six countries and should become operational within a short time. KFW has announced its commitment while
DFID is likely to do that soon. Sida would provide a reinsurance cover along with private sector reinsurers. For details see 3.2.
A guarantee for Asian Development Bank (ADB) is being prepared with the purpose of guaranteeing part of ADB’s loan portfolio so that ADB is able to expand its lending over the next few years. ADB has provided Sida with 15 infrastructure loans to India, Vietnam,
Sri Lanka and the Philippines as the sub-portfolio to be financed. These are mainly in energy and provided on ADB standard conditions over 25 years. A Sida guarantee corresponding to US$ 200 million is being discussed. Sida’s interest in providing the guarantee are twofold: to increase its cooperation with ADB and to have an instrument for influencing ADB’s work in terms of Swedish development values such as democracy, human rights, equality and so on.
Results
The guaranteed Concessionary Credit scheme in operation in the 1980s and 1990s benefited from a sound technical design and experienced staff across EKN, the Swedish
Export Credit Corporation (SEK), the banks and the supplying companies and BITS/Sida.
The recipient side mainly consisted of public utility companies and large complex contracts. Only in cases where clients were inexperienced in purchasing equipment under supply contracts would complications arise.
In the government commissioned report SOU 2006:17 seven ex-post evaluations were presented, which i.a. covered nine water and sewerage projects in China and a high voltage transmission line between South Africa and Namibia. The general conclusions from the
13 evaluations were positive. They suggested that the projects performed better in terms of capacity building and sustainability than had been the case in traditional grant-funded aid projects. Key success factors included competent partners and the fact that aid modality was reactive rather than proactive, responding to stakeholders’ own initiatives and providing necessary flexibility.
Of Sida’s independent guarantees, the one related to the roll-out of a mobile telephone system in Uganda has been particularly successful. The loan provided by a commercial bank was repaid prematurely and the guarantee thus expired. A second guarantee for the
Maputo harbor project with a BOT solution related to the Skanska contract was more complicated and had initial problems. In part, this was due to an overestimation of the demand for harbor capacity. Since then, and as the Mozambican economy has picked up, the problems have largely been overcome. There are no results to be reported on the independent guarantees from 2009 onwards. The system is still new and the projects are still under implementation.
Learning
A key lesson is that the long period of building up a guarantee portfolio within a system with in-built checks and balances and where the aid administration works with very competent partners has provided a very good training ground for the more complex guarantee challenges which lie ahead. It has also resulted in a substantial guarantee reserve that can backstop any major losses, should they occur. It therefore also acts as cushion against any reputational risk which is inherent in an independent guarantee system.
Risks
All guarantees are associated with the transference and assumption of risks. At a portfolio level, the risks include sector, country or volume concentration risks and those risks based on co-variance of smaller transactions linked to specific background factors which in aggregate create a substantial risk. Sida has never had a risk policy limiting its exposure in terms of size, geography, sector or individual clients. The lack of a risk management policy is potentially a high risk factor that should be reviewed.
From a broader perspective, Sida’s activities are only one out of several components of risks taken by the Swedish government. The overall monitoring of the government risks is the responsibility of the National Debt Office. It interprets the budget law, makes yearly risk assessments and provides guidelines to various government agencies, including Sida.
The Swedish Export Credits Guarantee Board is the specialized government agency on risks connected with cross-border commercial transactions, be they investments or exports of goods and services. Sida collaborates closely with both the National Debt Office and
EKN and draws on their expertise. This had been relatively uncomplicated when the transactions were not substantially different from regular export transactions guaranteed by
EKN. EKN advised Sida on creditworthiness of recipient countries, as well as on political and commercial risks involved in specific transactions. An important element in EKN´s advice was the level of risk-based premium, which should be set on the specific transaction. However, with the independent guarantee system as the basis for most innovation in the last few years the expertise of EKN is not sufficient or adequate. The risks have more in common with those that private sector insurance companies (including reinsurers), pension funds, institutional investors and large banks have to assess and to price. Sida actively seeks advice from this broader market, and makes an effort to set premiums close to market-rate. Sida has got a government mandate to subsidize the premium.
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The importance of setting aside funds that adequately reflect actual risks is repeatedly emphasized in relevant government regulations. The potential weakness of the Sida system is that it is not based on an established risk policy and risk model informing the premium.
The risk policy and risk pricing have become opportunistic. The National Debt Office has recently expressed words of caution on risks connected with innovative guarantees and has stressed the need for close risk monitoring.
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Challenges and scope for scaling up
Sida has a guarantee frame of SEK 10 billion established by government. Approximately
SEK 2.3 billion of guarantees were issued and outstanding at the end of 2013 of which 42
% was for freestanding guarantees. The guarantee reserve accumulated over 30 years of operations without substantial losses was SEK 1.8 billion of which 92 % was accumulated from the old system of concessionary credits.
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There is thus substantial headroom both in terms of possibilities to extend new guarantees and to assume additional risks.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways of funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante define desired results, and ex-post determine to what degree such results were achieved
Recycling of capital
There is a strong leverage effect by Sida’s guarantee instrument
Sida’s uniqueness in the granting of guarantees has resulted in new actors starting to engage with Sida
Sida is in the forefront internationally in structuring of independent guarantees in a flexible manner
Considerable, first with respect to the guarantee limit, and second if this limit is extended
The projects in which guarantees are applied tend to be specific in expected outcome, hence measurable both ex-ante and ex-post
Well applied, the capital underwriting the guarantees is not used, hence the recycling is potentially very large.
Important to ensure adequate capital base and premium reflecting real risk
3.2 DEVELOPMENT LOANS
Background
Sida (and sister organisations) have had different loan facilities in the past, including
Development credits 1965 – 1977 (an untied system) ended after an UNCTAD resolution
Concessionary credits 1981 – 2009 (tied system) ended due to its tying status
Conditional loans 1995 – 2007 (untied credits provided on an ‘if and when’ basis)
Assistance credits 1993 – 2005 (untied soft credits) ended due to lack of integration into Sida´s country planning proc Award winner in
Financial Times/ IFC Awards in innovativ financing for development 2014
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“
New financial mechanisms can cause new risks in the aid program provided by the government. The National Debt
Office would stress the importance of ex ante identification and analysis of those economic risks and costs which innovative financial mechanisms imply. Guarantees and insurance solutions are linked to future costs, the size of which it is difficult to assess. It is therefore also essential in connection with new instruments to take into account the need for adequate procedures related to risk management and financial control”, comments by the Swedish National Debt Office on the proposed Development Assistance Platform (our translation).
15 Sida´s Annual Report 2013
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ess
While the revised Loans and Guarantees (L&G) Ordinance 2009 provided for
Development loans the system had not taken off as the demand was that much higher for the new independent guarantee instrument. This product could be combined with loans provided by multilateral lenders, international and local commercial banks etc., which made the instrument very flexible in its application.
The revised loan scheme
A recent review of the L&G Ordinance after five years of experience, commissioned by
Sida, proposed revisions to the Development Loan regulations. A new aspect of the proposal is that Sida would be the lender on record. In the proposed new model, the interest rate would be market-based taking the actual loan loss risks into account. However, on a case-by-case basis, Sida may subsidize the interest rate through a grant provided that it has no market distortion effects. Alternatively Sida may provide a subsidy to the loan principal e.g. by writing off part of the loan. The maximum grant element is set at 80 % and the loans could therefore be made highly concessional. The loans could be provided in local currencies which may increase their attractiveness.
16
As regards to the conditional loans listed above, a government commission in 2006 reviewed the system. The system had been used for various purposes, including providing equity through the PIDG Trust to Emerging Africa Infrastructure Fund (EIAF) and
GuarantCo, refinancing investments by Swedfund, e.g. First Adili Bank in Tanzania and
AMSCO (an African management company) and funding national foundations, e.g. Prodel in Nicaragua. Conclusions by the commission included:
There was a high level of write offs of the loans
It was likely that the loans had had market distortion effects
The loans may have contravened the Capital Supply Ordinance prohibition of providing equity-type financing (in the cases of GuarantCo and Prodel a parliamentary approval of the investment by Sida had to be sought). The commission proposed that a general government exemption from the ordinance should be sought by Sida
There might be useful to look into the possibilities to provide conditional loans in a partly new format as noted in section 3.1 above (on EcoEnergy). It should in this connection be noted that the proposed new text of the L&G Ordinance does not explicitly prevent the extension of conditional loans provided that the market distortion effects would be avoided and the amount of subsidy required under a realistic risk scenario would be set aside ex ante into a security fund. An exemption from the Capital Supply Ordinance will however be required to make a revived conditional loan system fully operational.
17 18
Possible uses of the revised development loan instrument may be participation in loan syndications or other types of structured finance on both international and national capital
16 Setterwalls, draft new Ordinance for Development Loans and Guarantees dated 20 March 2014
17 A follow-up study is currently being commissioned by Sida to review this and other legal implications of this and related proposals
18 It is worth noting that Swedfund provides conditional loans under the Swedpartnership program. A separate ordinance has been issued which for this program makes Swedfund a government agency with all its consequences including open access to documents. See government bill 2008/09:22 .
16 markets. It could thus become a useful credit enhancement instrument. Another possible use lies in a possible cooperation with Swedfund as illustrated below.
Results and lessons learned
The results and the lessons learned from the concessionary credit scheme are presented above. No ongoing development loan scheme exists from which results or lessons could be presented.
3.3 PRIVATE-PUBLIC DEVELOPMENT PARTNERSHIPS
Background and design
The PPDP program, initiated in 2011, taps into Sida’s collaboration with large companies,
Swedish as well as non-Swedish. The program covers initiatives in which private and public actors share a common interest in creating opportunities and achieving development goals. Sida funding is complementary and Sida involvement is meant to be additional to a business venture, with clear benefits for the poor. In PPDP a private company and Sida jointly finance a project that is implemented by a third non-profit party. The PPDPs can be in any sector, and the third, implementing partly organisation can for example, be a NGO or a UN organisation. The program is re-active, i.e. companies are invited to propose a joint project based on guidelines posted on Sida’s home page. While Sida finances a maximum of 50% of the cost, there is no restriction on the amount. EU’s de minimis rule does not apply as PPDP is not a company subsidy, but a joint financing of a social or public good which is not exclusive for the applying company in order to avoid market distortions.
Innovative features
There are several reasons why Private Public Partnerships (PPP) can be considered innovative financing. First, PPPs constitute a means of leveraging ODA funds, as the company will have to provide matching funding of at least 50%. Second, it is a new form of partnership as commercial enterprises are engaged in developmental activities outside their core businesses, activities that generally should be carried out by government, but are not due to shortages of funds, poor performance, or neglect. Third, it mobilizes the managerial and technical capacity of multinational businesses for developmental causes.
The leverage effects of PPDP are nominally not significant, often based on a 1:1 matching basis. However, if the PPDPs contribute to changes in company behaviour, the systemic effects can be significant.
Sida in an international context
A public-private partnership is a well-established funding model, especially in infrastructure in the industrialized world. In the context of development assistance, the
United Kingdom (DFID) began with PPPs in the 1990s, and the Netherlands (DGIS) introduced PPPs in the early 2000s and had by 2012 invested about € 0,8 billion.
19
Germany has initiated over 3,300 PPPs between 1999 and 2009, totalling € 1,4 billion.
USAID, which began PPPs under its Global Development Alliance, has participated in
19 The Netherlands has established a Partnerships Resource Centre with the purpose of advancing knowledge on PPPs, lessons learned used to improve on the programme. The Center has a web page providing information on lessons learned in PPPs, results of evaluations and so on. www.partnershipsresourcecene.org
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1,600 PPPs with more than 3,000 different partners between 2001 and 2012. Sida is thus a latecomer in PPPs in the sense the concept is used here. While far from a pioneer in PPPs in the donor community, certain features of Sida’s PPDP are worth highlighting. First,
Sida’s PPDP program is designed to be untied aid. There is no restriction for companies anywhere in the world to approach Sida for collaboration under the PPDP. (PPPs elsewhere tend to be de facto tied aid and to some extent hidden export promotion. The
German PPPs have particularly been accused of this.
20
) Second, the third party element in
PPDP is not the common feature of similar programs.
Sida’s portfolio
Sida has currently eight projects in its PPDP portfolio, and a dozen such projects are in the pipeline. Among the private partners are Swedish multinational companies such as Abba,
H&M, Scania, Tetra Laval and Volvo Construction, but also non-Swedish companies such as Caterpillar, Green Resources and Lavazza. The projects include a variety of themes and subject matters such as vocational training; sustainable tuna fisheries; environmental protection, safety and health in textile industries; dairy for school milk; and climate change adaption and training for coffee farmers. Some examples of Sida’s PPDPs follow:
Vocational training Iraq – the Swedish Transport Academy jointly with Scania and UNIDO as implementing organisation. The purpose of the project is to improve the standard of vocational training in maintenance of heavy-duty equipment in order to reduce costs due to the breakdown of such equipment, improve the quality of vocational training schools in this sector and to create jobs for youth. The Scania project was one of the first efforts under the PPDP program. It came about as a result of a Swedfund investment in a Scania subsidiary in Iraq, and the notion that the quality of maintenance personnel in Iraq was sub-standard for heavy-duty equipment.
School milk distribution program in Zambia in cooperation with Tetra Laval. This PPP provides 15.000 schoolchildren in Eastern Zambia with school milk twice a week. The program also includes support to some 200 small-scale farmers who provide the milk. Other key partners are the Ministries of Education &Health as well as local companies and NGO’s. The dual purposes are testing a model of a school milk program in order to improve child nutrition and to stimulate the smallholder diary sector.
Coffee Climate Initiative assists coffee farmers in adapting to the effects of climate change by combining climate science with proven farming methods with the ultimate objective of improving the livelihoods for smallholder coffee farmers. The project is implemented in
Tanzania, Guatemala and Vietnam and aims at providing coffee farmers with the access to adequate knowledge and instruments. This will enable them to apply and finance effective climate change mitigation strategies to tackle some of the problems faced by small farmers.
The Coffee and Climate Initiative is a partnership between the Group of Leading European
Coffee Industry Partners. The Coffee and Climate initiative total project cost is an estimated
1.65 million Euros (14 million SEK), of which Sida provides about 4 million SEK. The initiative is also supported by the German Agency for International Cooperation (GIZ).
Results
The Sida PPDP program is too young to provide any robust evidence on development results related to the overriding objectives of Sida. In Swedish development assistance, the
20 As indicated in the Sida portfolio, there is so far a dominance of Swedish companies. This is mainly due to the fact that
Sida initially launched the program in Sweden and so far has not engaged in any significant promotion outside
Sweden.
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PPDP program has been breaking ground in engaging the (Swedish) business community in development assistance, improving the dialogue between Sida and business, contributing to Sida’s learning of what business can do and not do.
Learning
It is a common experience among donors that PPPs are cumbersome in design and management. The initial Sida PPDP took long time to set up partly due to inexperience by the companies in working with Sida and vice versa, requiring prolonged procedures trying the patience on both parties. The third partly element of the PPDP adds complexity in identifying such a party and bringing it along in the design. A further complicating factor was that the initial PPDPs were designed by Sida in Stockholm, but required the engagement by the Swedish embassies in the targeted countries. When the embassies of one reason or the other, were unhappy with the concept, considerable time had been spent in vain by Sida and the companies.
Risks
Sida’s engagement is in the form of a grant; hence the financial commitment is well-known with no future obligations. There is, potentially, a significant reputation risk involved in
PPDP in the sense that Sida might be seen as co-opted into controversial issues in multinational companies’ corporate social responsibilities, for example in workers’ rights or land-related issues. For example, a far gone preparation process of a PPDP with a Swiss company engaged in a large-scale bioenergy investment in Sierra Leone was eventually cancelled by Sida, likely due to considerable critique of the investment for land-grabbing by the civil society. (Sida’s engagement would have been vocational training and possibly upgrading of social amenities in local villages). Market-distortions and favoring Swedish multinationals are other risks associated with PPDPs.
Challenges and opportunities for scaling up
The PPP model lends itself for development efforts in basically any of the thematic fields of the Swedish development assistance, but this would require a more pro-active role by
Sida than is the case today. It would also require a stronger effort of seeking partnerships with other companies than Swedish (which know about the program and to some extent were instrumental for the program to be established). Embassies might apply the PPDP instrument in country results-strategies by identifying constraints and development issues within specific themes that might be addressed through PPPs and, based on this, review potential partners.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways of funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante
Initial leverage limited, usually 1:1
Strong – opportunities to work directly with a number of multinational companies in joint ventures and provide catalytic inputs to CSR
Not pioneering in an international context, but in
Swedish ODA
Replication can be considerable as proven internationally. Scaling up in individual PPDPs limited, but as a program considerable
Feasible.
19 define desired results, and ex-post determine to what degree such results were achieved
Recycling of capital None
3.4 CHALLENGE FUNDS
Background and design
A challenge fund is a financing mechanism to allocate (donor) funds for specific purposes using competition among organisations as lead principle. A challenge fund (CF) asks for proposals from companies, organisations and institutions working in a targeted field.
Challenge funds are set up to meet specific objectives – such as extending financial services to poor people; finding solutions to a specific health problem in developing countries; as a means of triggering investment to certain high-risk markets; to stimulate innovation for effective use of water resources, etc. Challenge funds do not have to be directed to commercial enterprises, but can also be aimed at other organisations such as research institutions, civil society organisations, and also public authorities. The scope of using CF for creative problem-solving in development is wide.
Innovative features
Several factors drive the interest in the donor community for challenge funds:
Competition is seen as a method of accomplishing development through triggering search for smart and cost-effective solutions.
Challenge funds provide leverage of donor funds by engaging private capital in matching financing of projects.
Challenge funds are a mechanism of directly working with commercial players without creating market distortions.
One of the innovative features of challenge funds is that is triggers creativity. The model of competition for resources is not only a mechanism to select the ‘best’ models, but can stimulate many initiatives, which did not exist before. Some of these are likely to continue even if they are not awarded by grants. The leverage effects are thus considerably more than the ratio of public-private funds in the awarded projects, which normally is 1:1. The ratio of applications to actual number of awards is a manifestation of this. (Often, only a few percent of applications are rewarded.) A case in point is several CFs undertaken in
Somalia by USAID and the World Bank with, in relative terms, rather small grants, have attracted thousands of applications from to a large extent diaspora Somalis.
Sida in an international context
While challenge funds have been used in many contexts, not least to promote innovations in health in industrialised countries, DFID was a pioneer in the late 1990s in the context of development assistance. These efforts included CFs for business linkages, financial deepening, tourism and civil society. Australian aid and Canadian aid followed, and
USAID also became increasingly engaged in large scale challenge funds. A version of CFs is the so-called ‘Grand Challenge Fund’ which functions as an umbrella and framework for a number of specific CFs. Sida has used challenge funds since 2011, in some cases with its own design and management, in other cases in cooperation with other partners. Thus, Sida was far from a pioneer in applying the challenge fund concept. However, in some
20 applications, such as the Innovation Against Poverty (IAP) Sida took on a pioneering role in promoting innovations aimed at the ‘Bottom of the Pyramid’.
Sida’s portfolio
Sida’s current portfolio includes five CFs and there are an equal number at a planning stage. Examples of Sida involvement in CFs are:
Innovations Against Poverty (IAP).
The program, launched in 2011, took its inspiration from the Bottom of the Pyramid concept. It was as a risk-sharing mechanism for business ventures involved in innovations with potential value to reduce poverty. IAP had two windows for grants of up to EUR 200,000 and applying companies could be from anywhere as long as the project took place in developing countries, including the Middle East. The IAP was managed for Sida by a consortia led by Price Waterhouse. IAP has an initial funding of SEK 51 million of which about half was allocated for the management. IAP closed in 2013 after five rounds having funded about 70 companies. The results of the IAP in terms of commercially successful innovation and building start-up companies are too early to decide. A proper timeframe is probably 10-15 years. The innovative features of IAP were: 1) addressing the needs at the ‘bottom of the pyramid’; 2) an explicit focus on promoting innovations for the needs of the poor; 3) providing seed financing at a business stage sometimes called the pioneering financial gap; 4) an effort to combine intensive learning with the investments, for example in annual learning conferences and a parallel e-platform for sharing experiences.
The Africa Enterprise Challenge Fund (AECF) , which started operations in 2008, provides grants and conditional loans to businesses that wish to implement innovative, commercially viable, high impact projects in (sub-Sahara) Africa. The AECF supports businesses working in agriculture, financial services, renewable energy and technologies for adapting to climate change. It also supports initiatives in media and information services where they relate to these sectors. Grants and repayable loans are provided between US$ 250,000 to 1.5 million. The competition is open to companies globally provided the business idea is implemented in Africa.
AECF was a DFID initiative and is financed by AusAid, Danida, DFID, DGIS and Sida. Total funding is US$ 200 million. Sida has contributed about SEK 217 million. The fund is a special partnership between Alliance for a Green Revolution in Africa (AGRA) and the donors. AECF has appointed KPMG as fund manager. Sida is the sole financing agent of one of AECF’s windows, for post-conflict countries, with Sida contributing funding of US$ 20 million. This window, operating 2012-2017, has currently disbursed funds to a dozen grantees. AECF has considerable momentum and has attracted different donors.
Making All Voices Count (MAVC) is a part of USAID’s Grand Challenge for Development. It is set up to support innovative ideas that improve citizens’ engagement with governments, which in turn could lead to less corruption and more effective government response. MAVC is funded by USAID, DFID, Sida and the Omidyar Network. Funding totals US$ 45 million of which Sida contributes US$ 15 million. Making All Voices Count seeks to bridge the existing gap between governments and citizens through making funds available in four windows that exploit mobile and other technologies in support of citizen engagement: The first window provides small grants and prizes as well as technical assistance to innovative ideas that facilitate government response to citizens’ feedback. The second window provides research grants to build up an evidence base around available applications. The third window will support the scaling up of successful initiatives. The global fund also seeks to catalyse global action and participation by building a global community of people working to identify solutions to increase and improve citizen and government engagement. The Fund Manager is a consortium led by the Dutch organisation Hivos. It will operate from 2013-2017.
The Challenge in Bosnia Herzegovina (BiH).
The purpose of the fund is to support the private sector by providing grants to project proposals that deliver both commercial benefits to the
21 private sector and developmental benefits to the population in BiH. The fund awards grants to provide partial funding of up to 50% of accepted proposal budgets (with a maximum grant size of EUR 30 000), to registered Bosnian and Swedish micro and small enterprises operating, or setting out to operate, in BiH. Its purpose is to mobilise diaspora Bosnians, especially in
Sweden, to invest in BiH in start-ups, micro and small enterprises without sector restrictions.
The Fund is small, in total of SEK 4,5 million over three years. A first call for proposals was made in 2013, attracting some 600 applications. The outcome of the Challenge is too early to assess. The innovative features of the Challenge is that it is a first effort of mobilising the
(Swedish) Bosnian diaspora to invest in their original home country and use skills and business ideas from outside; and 2) it has a low cost administrative set up with management in-house in the Swedish embassy in Sarajevo.
Innovation for Peace is a Columbian challenge fund promoting and mobilizing private sector contributions to peace-building. The objective is to result in more companies being committed and actively participating in the development of peace-building initiatives as part of their core business. The first call took place in 2013. Sida’s contribution is about SEK 10 million and the
CF is implemented jointly with GIZ.
Results
Sida’s engagement in challenge funds is young, and evidence of results in terms of outcome and impact are too early to be available. In a majority of the CFs, disbursement is still on-going to the winning companies. In the case of IAP, which is now closed after three years of piloting, the results in terms of successful innovations for the base of the pyramid will likely take close to ten years to emerge.
Learning
CFs can be tailored for almost any purpose and it is thus a versatile instrument. It is not just an instrument for private (business) sector participation. Hence, CFs can be applied for most of Sida’s priority themes, and be tailored to Sida’s results-strategies at country level.
CFs are demanding from an administrative point of view both in design and in implementation. Even when CF management is outsourced, as in the case of IAP, the demand on Sida administration during implementation was so demanding that Sida eventually pulled out. For these reasons Sida prefers to be co-funder and avoid taking management responsibility in multi-donor CFs. However, such funds are generally less focused on Sida’s objectives, hence fit less well in a result-strategy context. CFs are an innovative form of financing, but are also a model well suited to promote innovation. In fact, the first CFs in history were set up to stimulate research in health towards specific needs). In the case of Sida, several of the CFs on-going or in the pipeline are specifically focused on stimulate innovation. An example is a planned Sida CF for the nexus in between food security, water and energy.
Risks
Sida provides grants to CFs, hence there are no financial risks (as in guarantees involved).
The risks are whether the CFs will provide intended results over time, and if these results are additional to what the market anyway would deliver. There is also a certain reputation risk for Sida. For example, in the AECF Sida is funding up to SEK 10 million to individual enterprises in Somalia for which due diligence could not always be done well due to the security situation. Risks related to money laundering and financing terrorism and piracy are considerable.
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Challenges and opportunities for scaling up
As CFs can be tailored for almost any purpose, CFs can be applied for most of Sida’s priority themes, and be customized to Sida’s results-strategies at country level. The
Swedish Government urges Sida to increase its use of CFs. One means of expanding Sida’s own engagement might be setting up a Sida ‘grand CF’ as an umbrella for CFs, for example undertaken at embassy level. This grand CF could provide generic systems to be adapted for specific CFs (such as ways of form applications, procedures for granting awards, communication models, formats for on-line applications, systems for monitoring and so on.) The Grand CF could be outsourced to an implementing organisation, which would also act as a helpdesk.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other forms of funding in the sense of adding to ODA, the higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways of funding and financing mechanisms
Replicable and possible to scale up
Initial leverage limited, usually 1:1 Indirect leverage can be substantial
Strong – opportunities to engage with a very large number of companies and other institutions
Not pioneering in an international context, but in
Swedish ODA
Replication can be considerable as proven internationally. Some donors now implementing
CFs with budgets in the order of SEK 1-2 billion
Feasible. Measurable, i.e. that it is possible to ex-ante define desired results, and ex-post determine to what degree such results were achieved
Recycling of capital None
3.5 OUTPUT-BASED AID
Background and design
Output-based aid is considered a form of results based financing. RBF is typically defined as an approach to link the delivery of infrastructure and social services (the intended result and identified market failure) to performance-based incentives, such as rewards or subsidies. The incentive payments can be from public or private sources. In terms of approach, an RBF design approach focuses on determining what the desired results are and what incentives are needed to achieve the desired performance. By starting with the result—more children immunized, for example—and letting health workers and managers on the ground decide how to achieve them, fostering innovation to achieve results. RBF includes other forms such as output-based disbursement, conditional cash transfers, carbon finance and AMCs. These approaches use incentives to target demand and supply side failures. Output-Based Aid and AMCs are examples of a supply side incentive as the focus is on the service providers. Demand side incentives include rewarding beneficiaries for consuming services such as visiting clinics for regular vaccinations or attending school.
Innovative features
OBA is an approach designed to increase access to and the delivery of basic services to the poor using performance-based subsidies. OBA links the payment of aid to the delivery of specific services or “outputs”. The service delivery is contracted out to a third party, the service provider who is responsible for providing the up-front financing of the contracted
23 services until the agreed upon outputs are delivered and independently verified. The subsidy is explicitly targeted at the poor, depending on the context and the environment.
GPOBA seeks to be innovative by testing the OBA approach in new sectors and in fragile states. In addition, innovative features are found at the project level and derived through the competitive process. Potential service provides are often selected by the number of people they can serve based on a fixed subsidy amount and permitted to innovate as long as they meet the agreed outputs.
Sida in an international context
The Global Partnership on Output-Based Aid (GPOBA) is a multi-donor trust fund created in 2003 by DIFD and the World Bank to design and implement OBA pilot projects. The fund is administered by the World Bank. Since inception, the program’s donors have provided a total of $323 million in funding contributions and pledges. The core operating principles of the GPOBA approach are targeting of subsidies, accountability, innovation and efficiency, use of incentives to target the poor, output verification and monitoring, and sustainability.
Sida joined GPOBA in 2003 when the program was launched. In 2013, GPOBA received additional funding of US$26.8 million from Sida. Sida and the other development partners have received training from GPOBA in order to develop their own OBA projects and to mainstream the approach, to various degrees of success. AusAid, for example, has scaled up a water project working directly with the Government of Indonesia.
Sida’s portfolio
Sida does not have any OBA projects of its own design, but funds various projects that
GPOBA staff designs, implements and monitors. Below are some examples of projects funded by Sida under GPOBA:
A renewable energy program in Bangladesh to bring solar power to rural households that is one of the most successful in the world reaching hundreds of thousands of households. The program demonstrated an inexpensive and reliable way to bring electricity services to the poorer households. The program is combined with longer-term consumer credit offered by local financial institutions and service providers.
A solid waste management program in Nepal that improves services in five poor municipalities which is expected to reach 800,000 people over the four-year period. The performance based transitional subsidies are paid on improved waste collection and cleanliness as well as improved user fee collection, covering the gap between the cost of services and revenue collection. To encourage innovation, the municipalities are given the flexibility to design their own model as payment is based on output indicators.
A water and sanitation fund to provide water and sanitation services for 30,000 households in
Kenya. This project is being scaled up based on the recently closed community managed water project implemented by K-Rep Bank (and for which USAID provided a guarantee of 50% of the loans). This new project supports water service providers to access $16 million from domestic commercial banks to finance projects in low income areas.
Results
OBA makes its subsidy payment on measureable results defined as outputs. Further, an
OBA scheme should lead to i) lower costs, depending on the efficiency of the service
24 provider, and ii) opportunities and incentives for the service provider to innovate as provided by the terms of the contract and focusing on the results to be achieved. Examples of how OBA projects have resulted in efficiency gains, usually using competitive tendering processes based on lowest subsidy required or greatest numbers of beneficiaries reached.
An example is a Mongolia ICT project: competition resulted in 28% savings in the total subsidy required for the original areas/beneficiaries to be served. The savings were used to fund a wireless center, which is estimated to have 1,000 additional beneficiaries.
Learning
OBA approaches have been tested in every region and applied in six sectors, including energy, water and sanitation, health, solid waste, education, and information and communication technology.
Risks
Sida provides grants to GPOBA so there is no financial risk or on-going exposure to Sida.
The risks are whether appropriate projects will be identified and well designed so that the desired outputs are achieved on the agreed terms. The projects themselves contain a number of risks including that the beneficiaries will take the service (demand risk), that the unit cost pricing does not change and that the selected service providers will perform.
There is also a potential reputational risk associated with the different contracted stakeholders but that risk is mitigated through rigorous due diligence and vetting.
Challenges and opportunities for scaling up
Scaling up OBA pilot projects are already being done in a number of countries through
GPOBA or by other development partners. The expansion of a pilot program can take many forms such as to a different location (i.e. another region of a country), a different type of area (i.e. from rural to peri-urban) or with new stakeholders such as the addition of new service providers or new financiers in the event of a credit scheme. A current example of a pilot project that is being scaled up with Sida support, is a maternal health project in
Uganda, whose goal is to increase access to skilled care to poor women during pregnancy and delivery, through a voucher scheme. It was a successful OBA pilot project that is being expanded to enable the Ministry of Health to build capacity to mainstream the use of voucher schemes in the health sector in order to benefit from additional public funding from the government and other health development partners. Public clinics are being included as service providers. Sida is providing US$13.3 million to this project.
OBA differs from traditional development assistance, which tends to be input-based, i.e. the donors provide funding to a project upfront to finance certain inputs, which then are to lead to the delivery of certain outputs and hopefully outcomes. The problem is the measurement of the results, so that it is difficult to gauge the development impact of development assistance.
OBA not only allows for the effective measurement of results, but also disburses on results.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other actors or use of funding in different contexts
Limited to no leverage on pilot projects. Private companies through their foundations have continued to provide funding to expand access to their services to the poor.
Strong – OBA pilots have been replicated in other contexts
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Pioneering – that Sida is involved in new ways of funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante define desired results, and ex-post determine to what degree such results were achieved
Recycling of capital
OBA structures are changing and being applied to new sectors such as solid waste.
Feasible and underway in a number of cases
Measurable results is one of the attributes of OBA.
Aid is disbursed based on results.
None
3.6 PRIVATE PUBLIC MULTI-DONOR FUNDS
Private-Public Multi-donor Funds is a broad category, which can take many forms. This is illustrated below in the description of PIDG.
The case of PIDG: Background and Design
The Private Infrastructure Development Group (PIDG) is a multi-donor organisation set up in 2001 on the initiative of DFID, and today governed by nine international development assistance agencies, including Sida. PIDG’s mission is to mobilize private sector investment in infrastructure in countries where investment and experience is limited. It believes that infrastructure is essential to economic growth and poverty alleviation.
The PIDG members’ funds are invested through a portfolio of facilities to increase flows of local, regional and international investor capital, lending and expertise. The facilities are managed by independent fund managers and overseen by independent boards of nonexecutive directors. Activities of PIDG facilities fall into three broad categories:
Facilities that directly provide long-term debt finance in foreign currency (Emerging Africa
Infrastructure Fund (EAIF), ICF-DP 21 , GAP 22 ) and in local currency through guarantees
(GuarantCo)
Facilities that provide early stage project development capital and expertise in Africa and
Asia (InfraCo Africa and InfraCo Asia)
Facilities that provide technical assistance , viability gap funding to improve affordability and capacity building support to PIDG projects (Technical Assistance Facility (TAF) and to public authorities seeking to deliver projects with private sector involvement (DevCo).
In 2012, PIDG members, including Sida defined its approach for the 2013-2016 period through a Strategic Review. The PIDG members’ three-prong approach to infrastructure development is:
Focus on the more challenging infrastructure sectors for private sector participation
Build increased investment in the early stages of the infrastructure project cycle
Concentrate on poor and fragile states
Innovative features
The organisation continues to evolve and develop new facilities to meet the market failures in the infrastructure market.
Some PIDG facilities have been able to leverage donor funds by using these funds as equity capital providing a “cushion” for lenders.
PIDG operates as a public-private partnership organisationally.
21 Infrastructure Crisis Facility – Debt Pool – supported by KfW
22 Green Africa Power. The innovative GAP program is illustrated in a box below
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Its facilities make their investments based on Investment Policies defined by the donor agencies.
Some facilities have been structured to “recycle” or re-use the funds once investments have been repaid or guarantees expired.
The PIDG members can choose to invest in only those facilities that meet their aid objectives.
Results
PIDG has developed a track record, particularly with its earliest projects and can report actual results based on a robust results management framework and team. From 2003 to
2013, PIDG facilities committed approximately US$ 1.6 billion for 225 projects infrastructure projects in 57 countries. Ninety-nine PIDG supported projects have reached financial close 23 and these projects will provide new or improved access to infrastructure to nearly 200 million people, of which approximately 35% are female. These projects will create directly over 97,000 short-term construction jobs and 214,000 permanent jobs.
The PIDG facilities have attracted significant amounts of private capital for infrastructure development. Thus in 2013 every US$ that PIDG contributed helped to mobilise US$23 from the private sector and generated another US$10 from the DFIs. When fully constructed, these projects will have attracted additional financing of US$27.9 billion (of which US$19.4 billion or 69% is purely from private sector commercial resources. Over
72% of PIDG supported projects are located in the poorest countries (DAC I and II).
Cumulatively, over US$702 million have been invested in fragile states, representing 44% of its total commitments since inception. In general, PIDG is seen in the donor community as a success story in development.
Sida’s role
Sida has made investments in three of the PIDG facilities; EAIF, GuarantCo and TAF. It was one of the first donors with the Dutch and Swiss aid agencies when PIDG was formed.
Sida took an active part in setting up the first two investment initiatives, EAIF, which had the remit to leverage its equity capital by private borrowing and GuarantCo, a local currency guarantee fund whose mandate included developing local capital markets. EAIF has become a success both in raising capital and in building up a high quality project portfolio.
While GuarantCo was based on a Swedish idea that DFID accepted and implemented, Sida had difficulties in following suit on a timely basis, due to (i) the perceived risk of the concept and (ii) the challenge of providing equity-like of capital, which ultimately required a parliamentary decision to make the investment. As with EAIF the Swedish contribution was made as an interest-free conditional loan to the PIDG Trust, which it converted into equity. Sida saw GuarantCo as a vehicle to develop local capital markets and open them up to bond issues, so it provided funds into the PIDG TAF to support this objective. When
GuarantCo was seasoned enough to increase its leverage by taking up counter-guarantees from the commercial market, GuarantCo and Sida discussed various arrangements so that
Sida could smartly use its guarantee instrument as a lever but no decision was made for reasons of formalities.
23 PIDG finances most of its projects on a project financed based. Financial close refers to the achievement of having all funding committed and documentation completed to bring a project to operations.
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Sida continues to participate in all PIDG half-yearly Governing Council meetings in which policy issues related to PIDG and its facilities are discussed and decided but with little active involvement.
Learning
PIDG has become a recognized success, having been able to leverage significant amounts of private capital and with actual not expected positive development effects in terms of job creation, women participation, etc. Not only does it continues to innovate through developing new facilities such as Green Africa Power in 2012 and InfraCo Asia in 2011 but it is following Sida’s priorities in reaching the poorest and working in post-conflict areas. However, through a Sida lens, PIDG can be seen as a lost opportunity in innovative financing. It has not followed up on the possibilities of learning from PIDG experiences nor are they exploring the potential of joint funding with the PIDG facilities.
A lesson may be that initially Sida joined as an active participant in a new and unproven public-private partnership with unknown risks. It had taken “ownership” in the design of initiatives. However, the reduced interest and both financial and actual engagement by Sida over the years seems to have been a combination of (i) loss of a champion in its organisation; (ii) emerging political sensitivity and contradictions with existing regulations
(the tax haven debate and the Capital Supply Ordinance), (iii) a shift in Swedish aid priorities away from infrastructure; and (iv) overall project fatigue given the many new demands on Sida with limited staff resources.
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Risks
The members are not involved in the operations of the facilities. As such, the donors are not exposed to liability relating to the investments, loans or guarantees. While Sida provided a conditional loan to the PIDG trust, the funds are used as an equity base for loans and guarantees. Consequently, the risk is that the facilities have losses that require payouts from this capital base. PIDG has become a large and complex organisation, hence governance becomes an increasingly challenging aspect and does have reputational implications as well.
Challenges and opportunities for scaling up
The opportunities for scaling up the PIDG and the facilities have been demonstrated over the last few years. The existing facilities have grown by hundreds of millions of dollars.
This is expected to continue.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways of funding and financing mechanisms
Strong - Additional capital has been mobilised for a number of facilities both at the facility level and at the level of the projects in which loans, guarantees or investments are made.
Strong – There has been a strong demonstration effect from some of the PIDG projects.
PIDG has created new facilities and within its existing facilities such as GuarantCo it has pioneered new structures such as a Shariah guarantee in Pakistan.
24 It is noteworthy however that Swiss SECO and Austrian ADA, both with staff resources with less than 10% of Sida are actively engaged in PIDG.
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Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante define desired results, and ex-post determine to what degree such results were achieved
Recycling of capital
Feasible and underway
Measurable results – Development indicators have been confirmed with actual results based on operating projects.
EAIF and GuarantCo raise funds for loans and guarantees off their capital base. The capital has supported multiple projects
3.7 DIRECT INVESTMENTS
The government instruction 2013 which initiated this review mentions ‘direct investments’ as a potential Sida instrument. It can be argued that Sida as a matter of routine is already involved in direct investments, for example through their funding of facilities such as
PIDG, challenge funds or by providing finance to various trust funds established by multilateral organisations. Grants, and earlier conditional loans, have been used for such direct investments, which sometimes take the form of equity for the funded facilities and indirectly potentially also supported companies in challenge funds. The interest by donors making direct investments has its basis in understanding the importance of mobilising the private sector for development in terms of capital, expertise and improving the effectiveness of their aid.
If with direct investment, active ownership by Sida is implied, the issue becomes more complex. The Capital Supply Ordinance currently restricts such ownership by all Swedish authorities, including Sida. Hence, Sida needs to get an exemption from the Ordinance from the Parliament either on a case-by-case basis, or permanently to make direct investments. When Sida funded its investment in GuarantCo, the first approach was used.
Alternatively, Sida must convince the Government and the Parliament of a change of the
Ordinance, or provision of a general exemption for Sida. Sida has, as early as 2006, considered requesting an exemption but decided not to go ahead with the proposal. Sida is currently renewing its dialogue with the Government concerning the Ordinance in order to facilitate the use of equity as a tool for Sida.
Equity investment is typically included in the mandate of DFIs in most donor countries. As discussed elsewhere, one of the most dynamic developments in innovative finance internationally takes place through the complementary cooperation between DFIs and donor agencies. In this context, there is a new trend of donor agencies undertaking direct investments as equity holders jointly with their DFIs, and/or using the DFIs as fund managers. The DFID Impact Fund is one such example, in which DFID provides equity through the British Commonwealth Development Corporation (CDC), for impact investments focusing on Bottom of the Pyramid investments. The DFID Impact Fund is further described below. Similarly, the DKK 1.2 billion Danish Climate Investment Fund, in which Danida and Denmark’s DFI, IFU jointly invest equity with IFU providing the fund management.
There are also recent examples of donors making direct investments without relying on or cooperating with their DFIs. Examples include the Africa Guarantee Fund (AGF), which is briefly described earlier in this report and DFID’s Low Carbon Study Fund with equity provided by DFID and fund management carried out by Lion’s Head, a fund management company. In AGF Denmark and Spain are providing equity capital and DFID is likely to join. The objective of many of these investment funds is to mobilise private equity to the funds through a blend of private and public capital, often with differentiated shares. The donor equity will generally accept a lower return and higher risk to promote the development aspects of the funds. This is the structure of AFG, for example.
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If Sida should engage in direct investments in funds as those described above, a number of issues must be considered:
Sida needs a permanent exemption from the Capital Supply Ordinance as described above.
Treatment of the return of the equity capital and possible dividends at exit. Danida, for example, is considering setting up a fund under the government for this reason, but decision has not yet been taken.
The structure and balance of risk allocation and sharing when private equity is involved so that the donors do not take all the risks and the private sector all the profits.
Fund management. The most feasible solution is delegating the responsibility through outsourcing to a DFI or a professional fund manager. Care should be given, however, to structuring the relationship to minimise conflicts of interests.
Sida management capacity. Equity investments involve different skills in structuring and monitoring the investment and in ownership even if fund management is outsourced.
Treatment of negative aid flows. Recovered equity and dividends is subtracted from the aid disbursement in the current OECD/DAC recording. (The accounting system is under review to allow for new forms of development assistance, including guarantees and investments).
The relationship with Swedfund. Sida’s engagement in equity will have an impact on Swedfund. This might be seen as an opportunity for Swedfund, which appears to be the case in Denmark and the UK with respect to IFU and CDC. The potential risk of further marginalization of Swedfund in the Swedish development assistance architecture should be taken into account.
In summary, innovative financing is increasingly engaging traditional donor agencies in equity investments in various types of funds. Sida has expressed an interest to add this tool to its financial instruments, not least to be able to engage with other like-minded donors such as Denmark, the Netherlands and the UK. We suggest the modalities for such engagement to be subject for a further study under the Phase 2.
3.8 DEVELOPMENT IMPACT BONDS
Development Impact Bonds (DIBs) bring together private investors, non-profit and private sector service delivery organisations, governments and donors to deliver results that society values. They provide upfront funding for development programs by private investors, who are remunerated by donors or host-country governments—and earn a return—if evidence shows that programs achieve pre-agreed outcomes. If interventions fail, investors lose some or all of their investment. DIBs not only attract new sources of funding for development programs but offer a new business model that encourages innovation and flexibility for better results. Because investors assume the risk of financing programs, they have the incentives to put in place feedback loops and data-collection systems that make programs more responsive to the needs of beneficiaries and more likely to succeed.
A DIB Working Group explored the challenges and benefits of this new funding model for development and contexts in which it could be applied. The Swedish government through the Ministry of Foreign Affairs is represented in the group, led by the UK based Centre for
Global Development. For more details, see www.cgdev.org
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3.9 SIDA CASES
As requested in the ToR, we selected three Sida projects from its portfolio and developed case studies basing our selection on Sida’s definition of innovative financing and the parameters suggested. Recognizing the versatility of Sida’s guarantee instrument in an international context, we selected three examples of guarantees. The case studies focus on the purpose of the contribution, financial design, progress, results and lessons learned. The selected cases studies are:
The Global Health Investment Fund
The Pledge Guarantee for Health
The African Risk Capacity
These facilities are described briefly below. They are further elaborated in Annex 2.
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3.9.1 Global Health Investment Fund (GHIF)
Issues addressed
Only 10 % of the research on global health is devoted to tropical diseases while tropical diseases are 90 % of the burden in terms of population affected in the poor countries.
Pharmaceutical companies are disinclined to invest in R&D in products where the potential commercial return is limited as the purchasing power of the potential clients is extremely low.
No one government has the incentive to provide funds for the high development costs.
Structure:
GHIF is structured a not-for-profit trust set up as a private for-profit charity fund. 60% of the investable funds are guaranteed against loss. The Gates Foundation is the lead guarantor of GHIF.
Sida is providing a co-guarantee, channeling its ten-year partial risk guarantee through the Gates
Foundation. Lion’s Head is the Investment Manager.
Guarantee/Risk structure Investment structure Project structure
Private sector risk
Sida BMGF
Risk
Private investors
Medicine companies
Pension Fund
Charitable funds
Government funds
Funds
Available for new commitment
IFC
Project commitment to three companies
, Sida
BMGF
Individual investors
, KfW
Innovative features
A unique combination of aid, private capital and philanthropy working for a shared objective
Unleashing an affordable value chain to benefit the poor
A substantial leverage of the Sida guarantee amount of US$ 21,8m has crowded in US$108,9m of investment funds
Substantial scaling up possibilities in a second phase (with less aid funding)
Potential to be replicated outside the health sector (e.g. education)
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3.9.2 Pledge Guarantee for Health (PGH)
Issue addressed:
Timing delays (and uncertainty thereof) between the financial pledges of the donor agencies and the disbursement of these pledges. The goal is to increase the financial efficiency of these payments. For example, if the bed nets are not provided in time for a rainy season or medicine to avoid stock outs, the health of the targeted population is impacted.
Reducing logistic costs (reduction of air freight, for example) due to the timely delivery of the goods so that funds that would more efficiently used.
Improving pricing of goods and services: The uncertainty of the timing of payments causes suppliers to increase prices to hedge against potential payment problems, production schedule uncertainty and inventory management. The magnitude of this problem is significant: A
Brookings Institution study in 2008 indicated that up to 28 cents of each donor dollar is lost due to the volatility of aid.
.
Structure:
A health ministry would approach PGH with documentation confirming a donor pledge of funds.
PGH would issue a payment guarantee to a commercial bank operating in the country against which the procurement agency may get a working capital loan and open a letter of credit in favour of the supplier. Once the aid pledge can be disbursed, the donor pays to the bank.
Innovative features
Addresses the timing and volatility pledging and disbursing aid flows between donors and recipient countries by offering a solution to improve the financial efficiency of funds flows.
Uses commercial lenders to assume the risks of donor pledges
Substantial leverage of the US$ 50 million Sida/USAID guarantee – expected to generate US$
1 billion of lending capacity (and transactions) over a five-years
Potential efficiency gains to be made by bundling transactions and making bulk purchases
A new type of partnership among donors: donors taking risks on other donors´ pledges
Guarantee creates a “soft power” to incentivize donors to disburse funds quickly and the recipient countries to do what they have agreed to do.
Potential for scaling up and replicating the scheme; (e.g. other sectors, reduced guarantee coverage, greater pledge amounts)
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3.9.3 African Risk Capacity Initiative (ARC)
Issues addressed:
More rapid mitigation of the effects of serious droughts in African countries to reduce the loss of lives and livelihood for poor people.
Objective: To create a stand-alone pan-African risk pool through which the countries can insure themselves against the impact of weather events. An affected country will get more immediate payments to assist in alleviating the consequences of a calamity.
Weather-based system using information covering a 30-year period integrated into the Africa
Risk View software developed by ARC.
Structure: ARC Ltd as a sovereign-level mutual insurance company, governed by the ARC
Agency, where all member states have a seat. A Board of Directors carries out the governance of
ARC Ltd. Sida is being requested to participate as a guarantor with the reinsurers.
Innovative features:
Establishment of a pan-African mutual insurance system against drought. There is only one model with similar features, the Caribbean Catastrophe Risk Insurance Facility (CCRIF)
The assumption of risk by African countries assume responsibility for disasters in neighboring countries would be a new feature
A drought insurance instrument owned by affected countries to complement humanitarian assistance provided by international channels (including Sida)
The early nature of the ARC interventions would prevent unsustainable use and depletion of natural resources which follow in the wake of natural disasters and the reallocation of resources needed for development to short term use
Objective to crowd in international reinsurers to take substantial risks on an uncertain market at an affordable price
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4 INNOVATIVE FINANCE INTERNATIONALLY
The international scene in innovative finance is diverse and dynamic in the sense of development of a variety of new instruments. This review has neither had the purpose of undertaking a comprehensive review of the international experience, nor the time to do so.
It is limited to identify some trends and provide some examples of projects and programs that might be of particular interest to Sida as models.
In our brief review of the international scene, we selected four cases of international examples of innovative financing of a kind which Sida is not engaged in so far, and could be interesting models. Overall, in selecting the cases, we looked for mechanisms that (i) have a potential for replication, (ii) represent different instruments or combinations of instruments to illustrate the range of possibilities, and (iii) are innovative in the sense that they are first of their kind in their sector or specific use of instrument. We also made an effort to include sectors where Sida’s use of innovative finance has been limited to date, specifically agriculture /SME and energy. The four cases are:
African Agricultural Capital Fund (AACF)
The DFID Impact Fund
The Global Energy Transfer Feed-in Tariff (GET FiT)
Green Africa Power.
The first two are presented below. The last two are included in Annex 3. That annex also provides:
Some cases of well-known innovative financing mechanisms often discussed in the discourse of the subject.
Green bonds as a specific innovative mechanism
The application of innovative finance in three dynamic development finance institutions.
One of our recommendations is that Sida should undertake a more in-debt study in the application and learning in innovative financing by various agencies, donors, DFIs as well as private agents such as philanthropic funds and also impact investors.
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African Agricultural Capital Fund (AACF)
Issue addressed: Lack of banks willing to lend to agriculture, and in particular small-scale agriculture
Structure: AACF invests in small- and medium-sized agricultural enterprises to improve the livelihoods of smallholder farmers in East Africa by providing debt, quasi-equity, and equity along with technical assistance. Pearl Capital Partners manages the AACF. The structure is illustrated below.
J.P. Morgan invested US$ 8 million in commercial capital as senior unsecured debt at a below-market rate.
USAID provided a 50 percent guarantee at its standard fee for J.P. Morgan’s investment.
USAID also contributed a US$ 1.5 million grant to fund a TA facility that will support
AACF’s investees, and may be able to extend additional capital to the facility if needed.
The Gates Foundation (with US$ 10 million), the Gatsby Foundation (with US$ 5 million), and the Rockefeller Foundation (with US$ 2 million) provided equity capital on a paripassu basis
The AACF structure
Innovative features:
The AACF is innovative both in combining public and private funds and instruments, and in leveraging commercial capital for impact investments.
The four investors and the fund manager established portfolio-level social impact targets using
Impact Reporting and Investment Standards (IRIS) to manage towards benefiting smallholder farmers
To mitigate potential risks, the five collaborators increased the fund manager’s resources and helped ensure access to business support for AACF’s investees via the technical assistance
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The DFID Impact Fund
Issue addressed: Lack of patient capital for small scale market opportunities with high poverty reduction impact, often targeting bottom of pyramid beneficiaries
Structure: The CDC manages the DFID impact fund on behalf of DFID. The impact fund is a fund of funds with a clear strategy to invest in businesses that achieve positive impact on the BOP
(Bottom of the pyramid) population in their target geographies as consumers, producers or workers.
The fund will make investments of up to £75 million over 13 years. The DFID Impact fund invites proposals from impact investment vehicles (Fund Managers, holding companies and any other investment vehicles)
In the longer term, DFID aims to increase investments in bottom-of-pyramid business by demonstrating financial returns are possible. In the short term, the fund will catalyse increased capital through giving confidence to co-investors via robust due diligence and through offering limited potential subordination to private investors.
Funds are invested based on proposals from fund managers
In principle, the fund will be co-investing with others
For the first 6 years of the programme, technical assistance (TA) funding will be made available to intermediaries receiving Fund capital to use to support the development of the enterprises they invest in. Each intermediary can apply for an amount of TA funding equivalent to up to 10% of the amount of Fund capital it receives
Patient capital for bottom of pyramid investments
Innovative features:
The CDC impact fund demonstrates the benefits of merging patient capital without return requirements with financial expertise in development finance institutions (DFIs).
Leveraging the expertise if CDC to channel funds to business opportunities below the typical investor threshold in both size and risk/return profile
Breaking new ground, building business skills, and demonstrating financial viability in an immature market where capital is scarce due to combination of real and perceived risks
More information. http://www.theimpactprogramme.org.uk/ and http://www.cdcgroup.com/dfidimpact-fund.aspx
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5 STRATEGIC ALLIANCES IN INNOVATIVE FINANCING
Sida’s innovative financing is dependent on strong partnerships. These include ‘old’ partners, such as International Finance Institutions (IFIs) and DFIs, but with whom new forms of cooperation are structured. Other partners are new to Sida, such as the philanthropic foundations, or new initiatives created by organisations such as PIDG. There are also bilateral strategic alliances with other donor agencies with which Sida has had little or no cooperation historically such as USAID. This chapter reviews three of Sida’s key strategic partnerships for innovative finance: USAID, the Gates Foundation, and
Swedfund.
5.1 USAID
USAID has a long experience of independent guarantees and has done numerous transactions. A useful approach for Sida with its remodeled guarantee system in 2009 was to enter a partnership with USAID. A Memorandum of Understanding (MOU) was signed in 2010 between the institutions that would, in particular, cover microfinance and SME institutions and banks that had as a target group underserved but creditworthy clients.
USAID, with an established program, Development Credit Authority (DCA) took on the role of agent. DCA structures and processes the guarantee transactions, manages any claims processing and does the monitoring of the joint operations. The identification of potential guarantee transactions has been a joint effort. Sida has typically participated in project identification missions and in due diligence processes. Much of the dialogue has taken place between the head offices but increasingly the embassies have participated.
Sida and USAID have jointly granted eleven partial credit guarantees (four in Kenya, two in Bosnia-Herzegovina and in Uganda, and one in Mozambique, Moldavia and Zambia).
The two institutions have shared the risks on a pari-passu basis and have provided comprehensive guarantee coverage of between 50 – 60 % of the loan amounts for a 7 to 10 year period. On occasion, Sida´s risk coverage has been slightly larger than that of USAID.
There has been a similar split in the grant funding that has accompanied the guarantees.
USAID often takes the technical assistance portion while Sida focuses on the needed subsidy element. The total guarantee amount for these “portfolio” guarantees has been US$
94 million. The two organisations have also offered a joint guarantee of up to US$ 50 million for the Pledge Guarantee for Health initiative. Sida has set aside a reserve of US$
750 million for its share of these guarantees. There is substantial headroom for additional transactions.
Through a MOU signed in 2013 a new joint innovative initiative is being undertaken. Sida describes it as “a momentous cooperation with the biggest investment in Swedish history and the largest partnership with another grantor in the history of USAID”.
25 The focus is on the “power of bright ideas on solving the problems of the world’s underprivileged population.“ Sida is joining with USAID to promote and fund three of its five Great
Challenge funds:
Making All Voices Count , see description under Challenge Funds.
25 This and the following quotation are taken from a Sida official publicity handout
38
Powering Agriculture, which targets clean energy within the agriculture sector. It is being funded by Sida (US$10 million through a grant), USAID, African
Development Bank and Duke Energy, a major American energy company for a total of US$ 25 million.
Securing Water for Food , which tackles the issue of clean water by innovations in areas such as water efficiency, reusing waste water and resilience to drought through water capture and storage systems.
The strategic alliance with USAID has many advantages for Sida not least that it allows
Sida to piggy-back on USAID’s technical capacity in designing and implementing large scale projects in guarantees and challenge funds. But this also has a cost – the United
States and Sweden have to a degree different political agenda behind their development cooperation, which may spill over into project design.
5.2 GATES FOUNDATION
The Gates Foundation is the largest philanthropic organisation focusing on health in the world and they represent a key partner for Sida in developing forms of innovative finance.
The two organisations have similar values and priorities in the health sector. The Gates
Foundation has been a significant source of innovative models, with a program development unit dedicated to finding solutions to address health challenges in the developing world. For approximately 15 years, Sida has been a member of a broad privatepublic health partnership where Gates Foundation has a substantial influence. Sida has tried to influence the dialogue emphasizing the possibilities to combine upstream innovations with support to national health systems and the internal efficiency of the mechanisms set up.
Sida facilitated a study in 2009 with the objective to determine whether Sida’s financial instruments could assist the Gates Foundation in finding the keys to enhancing existing funds and to catalyze and leverage the private sector towards addressing the needs. Around the same time, a more direct and focused partnership 26 was created around a specific program where the objectives of the Gates Foundation did run in parallel with visions developed in Karolinska Institutet (KI) and where Sida could participate with its flexible independent guarantee system. This resulted in the creation of the Global Health
Investment Fund.
The parties signed an MOU in 2011 in which they expressed their wish to partner in sharing the risks involved in scaling up funding beyond aid and aid-related resources. The
Gates Foundation had already established an alliance with JP Morgan Chase & Co, a bank with a strong interest in raising funds for social impact projects and the capacity to take on the role of structuring a facility, involving multiple stakeholders. In 2012, Sida partnered with the Gates Foundation on the establishment of a Volume Guarantee program in which the two suppliers of contraceptive implants for women, Bayer and Merck, agreed to produce and sell 27 million and 13 million respectively of implants at a predetermined price, which was significantly discounted from the prevailing market price. Additional
26 Gates philosophy is summed up in his latest annual letter: “Our foundation is teaming up with partners around the world to take on some tough challenges: extreme poverty and poor health in developing countries … We focus on only a few issues because we think that’s the best way to have great impact”
39 partnership initiatives are in the process as Sida is actively looking into new possibilities connected with Grand Challenge Funds being promoted by the Gates Foundation.
Box 3: The Gates Foundation
Bill and Melinda Gates created the Gates Foundation in 2000 as a public-private partnership and started launching funding of new vaccine development for children in the poorest countries.
They provided US$750 million up-front to make it have an immediate impact. They founded
(and have taken the lead role in) GAVI, the Global Alliance for Vaccines and Immunization to address the challenge of bridging the gap between the needs and the available resources and opportunities. Donors, including Sida, hesitated initially when confronted with this mode of vertically addressing health issues, being more comfortable with a broader, horizontal approach where health problems would be addressed at a basic level such as through primary health facilities. However, the possible impact of working upstream with R&D in focus in order to provide vaccines against TBC, HIV/AIDS, malaria, diarrhea, with the involvement of universities and research institutions on board as the major pharmaceutical companies, was soon evident. Sida was an early participant, joining in 2002 with a small contribution that has increased over time. As of 2013, GAVI has mobilized US$8.4 billion from a total of 36 multilateral organisations, bilateral donors, charitable trusts, private companies and individuals.
The Gates Foundation represents one-fourth of the total funding and Sida 3.6% thereof. GAVI has also given large contributions to IFFm and to various Advance Market Commitments. The
Gates Foundation has also been a major funding agency for the Global Fund, together with
Sweden and other donors.
5.3 SWEDFUND
Background
Swedfund is a limited liability company owned by the Swedish state (up to early this year through the Ministry of Foreign Affairs, now through the Ministry of Finance). Swedfund has during its 30 years of existence as the Swedish DFI invested in more than 220 companies together with strategic and financial partners. For a long period of time the investments had to be in tripartite joint ventures, where a local and Swedish company partner had the equity majority while Swedfund came in as third minority partner with equity participation (maximized to one third of the total equity capital) or loans.
Swedfund is among the smallest European DFIs. The fund is also small in comparison to its Nordic counterparts. Its investment portfolio is only about one quarter of that of
Norfund and it is substantially more limited than those of IFU (Denmark) and Finnfund.
The active Swedfund portfolio at the end of 2012 was 91 projects while IFU had 253 projects in its portfolio. Further, while Swedfund´s total investment portfolio was 8 % of the annual Swedish aid allocation, the corresponding figures were 129 % for FMO, 45 % for Finnfund, 29 % for Norfund and 24 % for IFU.
27
In comparison, FMO (the
Netherlands) is the giant among the European DFIs with 850 projects and an investment total of EUR 6.3 billion, i.e. 20 times higher than the Swedfund portfolio.
28
Collaboration with Sida
In one of the first Sida independent guarantee projects, the Maputo harbor project,
Swedfund had a limited role in which it participated with FMO in a loan consortium. Since
27 Swedfund presentation 3 mars 2014. Figures referred to are from 2011.
28 EDFI annual report 2012
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2009, there has been no substantial Swedfund participation in any international project linked to Sida guarantees. This is in contrast to the participation of other DFIs. Examples include KfW in the GHIF and ARC projects, IFC in the GHIF, EIB in the Global Finance
Consortium project and AfDB in the African Guarantee Fund as well as in the EcoEnergy project. FMO has also had a prominent role in structuring GuarantCo and participates as one of its counter-guarantors, while KfW is the principal investor in the International Crisis
Facility – Debt Pool (ICF-DP), an initiative within the PIDG organisation.
The collaboration between Sida and Swedfund over the last few years has been strained, and the relationship between the organisations more characterized by disputes than fertile cooperation. This is stark contrast to similar organisations in the Netherlands, Denmark or
Norway.
Future collaboration with Sida
A stronger collaboration between Sida and Swedfund would be beneficial for the Swedish aid program. PPDPs are an obvious area for collaboration. The first such project that Sida supported was a result of a Swedfund investment in a Scania subsidiary in Iraq. It has been a fruitful collaboration for all parties. Swedfund staff has suggested the idea that companies in Swedfund’s portfolio could be platforms for PPDPs in a variety of countries and sectors.
There are other platforms from which a renewed and more dynamic cooperation could be launched. One of them has already started, namely freestanding portable guarantees offered by Sida, which Swedfund can use to assist clients (e g venture capital funds) to take up bank loans. If the guarantee would be against first loss there is a possibility that a loan structure be established where senior lenders with lower risk appetite could come in. In a current arrangement Sida and Swedfund have contracted a framework guarantee agreement of 45 MSEK, subsequently increased to 100 MSEK. However, it has only been used for two projects. A further commitment has been put on hold because of differences in approaches on how to handle a distressed company, whether to liquidate it (Sida’s approach) or to restructure it by providing additional funds or extended time to effect repayments (Swedfund’s proposal). No doubt the parties could resolve this impasse through a dialogue and move on.
A concrete opportunity is currently being discussed between the two agencies. The
Nairobi-based African Guarantee Fund has been set up by the African Development Bank,
Danida and the government of Spain with a total equity participation of US$ 50 million.
The mandate of AGF is to provide guarantees to SMEs and to banks’ on-lending to SMEs.
The gearing ratio is 3:1, implying a maximum guarantee capacity of US$150 million, which has already been committed. Sida has been asked to provide a counter-guarantee
(reinsurance) to enable AGF to continue its expansion. The equity capital of AGF is structured in three layers – Category A with highest risks intended for donors (where DFID has indicated preparedness to come in – presumably via a trust fund), Category B for DFIs
(including AfDB) and Category C to private sector investors. This might be an opportunity for Swedfund to partner with other DFIs as owners of Category B shares and with Sida using its guarantee facility. Both parties would participate with their respective instruments and would contribute with their specific skills. A new forum for dialogue might appear where the Swedish Embassy in Kenya, responsible for regional cooperation with Africa, and the regional office of Swedfund would participate actively.
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5.4 POTENTIAL PARTNERSHIPS
Overall, the landscape of stakeholders in development using forms of innovative finance has been expanding. The list of funders encompasses participants from the public and private sectors as well as philanthropic and social impact investors among others.
Consistent with an international trend of new combinations of actors and partners, donor agencies have moved from a pattern of cooperation with three key partners: governments in developing countries and their authorities, multilateral organisations, and civil society organisations, to a system involving a large number of old and new potential partners schematically described below:
Figure 4: Multiple stakeholders in the innovative financing space
ODA
Sida cooperates with some of these but has so far not engaged with others. For example,
Sida has not had any significant engagement with the growing number of so-called impact investors (which are seeking both a social/developmental and financial return on their engagements). Nor has Sida had any direct engagement with the flow of remittances from richer countries to poorer, currently estimated to be over US$ 400 billion per annum.
If Sida intends to significantly scaling up its innovative finance, Sida needs to take a strategic look into the landscape rather than operate re-actively. If Sida on the margin can influence for example remittances or major flows of foreign direct investments, the impact could be very substantial. A few years back, Sida attempted such an approach in landrelated investments. Noticing the major investments in large-scale agriculture in Africa, not least by China and other Asian countries, Sida initiated a process to see how Sida could influence these investment flows along Sida’s values, hence play a catalytic role towards more socially responsible investments. In this process, an inventory of some hundred potential partners was undertaken. The process was put on hold due to its controversial nature, and critique from the NGO sector.
A further analysis of potential new partners is proposed as a topic for further study in phase two of this study.
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6 CHALLENGES FOR SIDA IN INNOVATIVE FINANCE
This chapter draws from case studies and interviews and summarizes the main challenges for Sida going forward. Challenges described immediately below include organisational and strategic issues. The second part of this chapter specifically addresses how Sida’s new results strategies can underpin intentions to scale up and further develop innovative finance in Sida.
6.1 ORGANISATIONAL CHALLENGES
Sida as a pioneering, risk-taking organisation
As illustrated in various cases discussed in this report, Sida has been an early participant in innovative financing and continues to be able to play a pioneering role in new and potentially high-risk ventures. In some ways, this reflects Sida’s history from the 1960s and 70s when Sida was a pioneering donor in ventures such as integrated rural development, population control, reproductive health and support for democracy and human rights. Hence, there is a culture of pioneering in the organisation as well as in the overall Swedish aid administration. This is critical as a platform for a small, underresourced organisation (in terms of staff) to be innovative. Maintaining such a culture is critical, not only for new financing mechanisms, but for Swedish aid in general.
Contributing to Sida’s ability to be pioneering is the governance structure in the Swedish aid system that allows for experimentation due to close links between Sida and the
Ministry of Foreign Affairs, a considerable degree of informality and joint problem solving between these entities. Sida is less tied by a rigid formal structure than many donor agencies, a factor commented on by many of its partners. The development of the guarantee instrument over time, and the unique flexibility of this instrument is a good example.
Many of the innovating ventures in finance have been the result of the initiatives of
‘intrapreneurs’ within Sida. They act as change agents to drive a certain idea, often in opposition to the bureaucracy. For Sida to continue to be innovative, it is essential to allow, and even incentivize creative forces and creative people to flourish. Various administrative routines and control systems can easily become an enemy of innovation.
Need for staying power
While Sida has been at the forefront in some innovative mechanisms, there is a tendency for program fatigue to set in. This appears to be time-related due to the burning out of the original intrapreneurs. The demanding tasks of moving complex, pioneering projects are then left to staff members without the same personal commitment who act more as caretakers than developers. Frequent shifts of personnel further reduce the personal interest. There is also a tendency to view a program, even those that are successful or that are continuing to innovate within the program, as no longer “new”, innovative or interesting, consequently not worth continuing to follow it or develop it further. It is often over time that programs can expand on original innovations as stakeholders become experts and identify initially new approaches or needs. This is an opportunity currently being missed in the search for the next “new” idea. PIDG is an example of organisational fatigue as is Sida’s handling of the IAP challenge fund.
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Needs to standardize and scale up innovations
An effective organisation must both be able to innovate and to transform innovations into replicable ‘products’ that the organisation can scale up and produce in volume without recreating the product each time or relying on an individual expert’s experience.
Standardization and replication of (proven) innovations require established systems, procedures, manuals, well-documented models, good internal communications and inhouse technical expertise. It needs models that can be taken down from the ‘shelves’ and be replicated. Innovative financing structures need this more than many forms of assistance as they are technically complicated and new to the user.
As discussed below, even if there was a system to standardize some of its products to use them in other context, this issue is linked to Sida’s ability to execute projects without relying on their partners to undertake all of the implementation work. For example, Sida has co-guaranteed several transactions with USAID under the DCA program. But it is
USAID that has the infrastructure to execute, replicate and monitor these guarantees both at headquarters and in the field where US Embassy staff have the capacity to carry out project preparation and project monitoring.
The gap between centre and field
Our interviews in Sida indicated that at the Embassy level there seems to be a perceived pressure from ‘above‘(management, government) that the organisation should be innovative and apply innovative instruments. However, limited staff resources prevent much of this. Further, the ability to learn from application of the new instruments, assess results, and improve on them is constrained by time, knowledge and experience. (This issue is linked to the point on standardisation.) There is a risk in innovative financing that some sections of the headquarters push ahead with new ventures, while the rest of the organisation has problems in catching-up and to applying the new instruments. Sida needs to develop mechanisms and internal communications processes by which innovations are disseminated and can be applied throughout the organisation. This need is reinforced by two key recent systems changes in Swedish development assistance:
An increasing share of the aid budget will be implemented by the Embassies. For example, central budgets to design and implement guarantees, challenge funds and
PPDPs are reduced and shifted to Embassy level.
The new result-strategies introduced by the Government.
Too much piggy-backing?
The pressure to disburse, the high cost of pioneering and the shortage of staff are all strong incentives for Sida to join innovative financing mechanisms invented by others rather than do the pioneering work itself. Such a strategy can be rational for a small aid organisation, but has some draw-backs. First, the targeting of Sida’s resources is less precise as Sida has to accept other donors/agencies priorities, whether in terms of country focus, thematic approaches or political agendas. Second, too much outsourcing undermines valuable learning and accumulation of experience over time, especially if Sida acts as a largely passive partner. Consequently, Sida needs to find the right balance between joining innovations by others and undertaking its own ventures, ideally also with the participation of others. In the current situation this requires more from Sida’s own innovations. This, in its turn, requires managerial patience, sufficient resources, freedom, support and incentives for the staff involved, and concerned explorative efforts. The tendency by Sida to piggy-
44 back was commented upon several persons interviewed, with staff lamenting that Sida is not more often in the front-seat.
Constraining regulations
As a government authority, Sida operates in a political context and is governed by various laws and regulations. Innovative financing as applied by Sida tests the borders of such governing structures that often are general for the Swedish administration. As Sida’s mandate is quite different from most other authorities and agencies, these regulations might make little sense from a Sida and development perspective. Examples of such regulations are EU’s de minimis regulation on maximum subsidies to enterprises in the EU, and the
Capital Supply Ordinance, and, to some extent, also the Law of Authority Responsibility.
The interpretation of such regulations and laws in Sida’s operation can at times be rather arbitrary, person-based and shifting over time without clear justification.
29
In a global context, Sida is in many ways more restricted in its practical applications than, for example, DFID. However, the opposite is also true, as reflected in the application of the guarantee instrument in which Sida seems to have more flexibility and headroom than most donors. In general, Sida seems to take a more cautious approach in the interpretation of regulations than warranted, again, guarantees may be an exception from this. It is clearly the case in Sida’s own administered challenge funds, however.
The gap between ex-ante and ex-post in innovation
Embedded in the concept of innovation is that it is something new. As reflected in this report, the innovative financing mechanisms highlighted are often very new, many of them yet in the design stage. To what extent these really will deliver results linked to the overriding objectives of Sida are in the form of expectations, rather proven or based on evidence. While Sida has applied challenge funds for a few years, the outcome of these in terms of development impact is unknown, and might not be evident for another 5-10 years, especially to what extent the efforts create anticipated systemic impact. (In contrast, older innovations, such as the PIDG facilities to which Sida contributed, have demonstrated impacts, but these results are not used as the basis for additional innovations by Sida.)
Innovative finance is therefore to a large extent a matter of expectations in terms of aid effectiveness. As a leverage mechanism, the feedback is of course much quicker, but this aspect is, on the other hand, linked to additionality and counterfactuals. There is a tendency in some projects to exaggerate the leverage effect and neglect the question of counterfactual. Given Sida’s new result-strategy framework, the focus on assessing impact needs to be stronger and also aligned to the indicators to be used for assessing results and performance in these strategies.
Missed opportunity – collaboration between Sida and Swedfund
In a global context, some of the more innovative models of development assistance take place in the cooperation between the aid organisations and the DFIs. A principal example is the longstanding cooperation established in the Netherlands between DGIS and FMO.
Similarly, the emerging constructive collaboration between Norad and Norfund is an interesting example. The Norwegian government’s interest in continuously strengthening
29 The interpretation of regulations can sometimes create absurd situations: for example, in IAP Sida limited the grant support of awards to winning companies to EUR 200,000 (SEK 1.7 million) with reference to the de minimis rules, while in AECP, Sida funds of up to US$ 1,5 million (SEK 10 million) can be granted to what might be the same company in the same location.
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Norfund with annual additions to its capital paves the way for many innovative approaches some of which also include Norad. In Germany, DEG and KfW are key instruments in innovative finance. Such synergies appear absent in Sweden. While there had been different efforts of collaborations between Sida and Swedfund, the relationship today is almost non-existent and largely acrimonious, acutely reinforced by the instruction by the
Government that Sida should review the option of direct investments. One underlying reason might be that in relative terms there is a larger difference in budget allocations between the donor agency and the DFI in Sweden than for any other European country.
This gap not only means that Swedfund is limited in its operations, but it also contributes to the inequality in the relationship. Overall, the Swedish development assistance is losing the opportunity for one of the more dynamic aspects of development finance by the frozen relationship between its main organisational instruments.
Management of guarantee and loan risks
As already noted Sida has managed the guarantees in its portfolio extremely well to date.
Sida has not incurred any substantial losses during the last 20 plus years. The guarantee reserve has grown over time to the point that the government reduced it by approximately
SEK 800 million.
30
The guarantee premiums that have been charged (in the aggregate) have been sufficient to cover the risks. Until recently, Sida provided a standardized product, the Concessionary Credits. The guarantees linked to credits covered contract financing and had substantial similarities with export credits that EKN guarantees. So, with similar products, EKN could provide all the necessary expertise to determine an adequate risk assessment.
This situation changed when the independent guarantees were introduced. There is no longer any standardized product and the guarantees cover new and untested risks. Each of them provides risk coverage for a unique challenge. Collectively they add up, in our view, to considerable risk. As the “traditional” guarantees expire and the cushion that they provide disappears from the portfolio, Sida’s overall risk exposure will increase. (This is also the case with the new development loans in terms of risk management and exposure).
Unique guarantees means that there is no one established risk-based guarantee fee structure. The fee and the subsidy element to be paid into the guarantee fund are now set opportunistically. It is dependent on the expert advice that Sida gets and its own judgment.
And with a new structure, there is no historical experience on which to base risk assessments. While we recognize the benefits to having a flexible guarantee product, there is a need to have a consistent analytical approach.
Innovation implies experimentation and the assumption of new and less tested risks. While a guarantee loss implies a potential reputational risk for Sida, having a clear rationale for taking the risk and properly pricing it could mitigate negative publicity. Our recommendation is that Sida should tighten up her risk monitoring. A high-level risk management committee should be established which meets regularly to evaluate the portfolio’s risk exposure. A premium model should be developed to guide Sida staff in negotiating premium levels with partners and stakeholders. An officer with a line responsibility outside the Loans and Guarantee department should have oversight of guarantee risk exposure as one of his/her principal duties. However, this proposed internal
30 The repayment referred to a specific transaction in India under the CC system and to an interest differential which had been favourable to Sida. A similar situation will most likely not be repeated.
46 risk management system should not replace the external monitoring system by EKN and the National Debt Office.
6.2 CHALLENGES WITHIN SI DA’S RESULTS STRATEGIES
The results-strategies and the new aid platform introduced by the Government in late 2013 and 2014 pose major challenges in the use of the innovative financing instruments. The leading principles behind the Government’s result strategies are
Having poor people’s needs at the center for all of Sida’s work.
Focus on themes linked to poor people’s needs, rather than support to conventional sectors.
Designing Sida’s support towards the overriding results/objectives – making aid outcome-driven rather than output driven.
Being able to measure results and draw the conclusion from achieved results in future allocations of aid.
As discussed earlier in this report, Sida will have results-strategies at three levels: (i) for partner countries and regions; (ii) for the cooperation with multilateral organisations, and
(iii) for thematically oriented development assistance. Results-strategies at country level have been prepared and issued by the Government for selected countries, including
Myanmar, Somalia, South Sudan, Sudan, Tanzania and Zambia. Others are being prepared.
There are also selected result-strategies for thematic areas, including sustainable development (environment and climate), human rights and capacity development.
The current portfolio of Sida’s innovative financing is diverse, covering many themes and areas. As much of the applications are reactive, i.e. responding to the proposals of partners, the portfolio does not have a strategic focus. This is also true for sub-portfolios such as for
PPDPs Challenge funds and Output-Based Aid. In Sida’s new result-strategy framework such an approach will not fit well. Sida needs to be considerably more pro-active in the choice of interventions and, above all, assure that the use of innovative financing (as all other instruments) is emanating from the result strategies, rather than the latter being a product of the former.
Thematically, t he current use of innovative financing in Sida versus the themes/objectives in the new Government platform varies considerably. For some of the themes/objectives, the instruments are applied extensively, for others hardly at all. The table below gives some examples:
Table 4: Experiences of innovative financing
The Government’s overriding sub-objectives
Strengthened democracy and equality, increased respect for human rights and freedom from oppression
Improved opportunities for poor people to contribute to and benefit from economic growth, and have access to good
Current application of innovative financing Comments
An upcoming guarantee for media development in Uganda with Oxfam.
A challenge fund with USAID – Making All
Voices Count. A planned guarantee with ADB will have as an objective to include ADB’s lending with Sida priorities such as democracy and human rights.
Several guarantee projects jointly with USAID with focus on agriculture, such as SME development in Kenya; value chain development in Mozambique, micro finance with Deutsche Bank, biogas development in
Limited use so far. In the new results-strategies, requiring a creative effort, perhaps linking to new partners. PPDPs with a focus on the CSR of multinationals might be an approach
The range is already considerable, but can be scaled up at country level.
Public-private investment funds are a key instrument, but
47 education Tanzania, Challenge funds with USAID in powering agriculture in Africa; Africa
Enterprise Challenge Fund, in PPDPs in coffee farming to adapt to climate change in
Tanzania, Dominican Republic and Vietnam; improved conditions for workers in garment factories in Cambodia with HM in a PPDP
Education, on the other hand, does not feature in these instruments, except vocational training in maintenance of heavy duty equipment
Examples: Guarantees for wind energy in
Pakistan; AECF has energy as a focal area. also the considerable number of funds being set up by and with impact investors.
Sida needs to investigate how its innovative financing instruments can be applied in education
Improved environment, reduced climate impact on strengthened capacity against negative environmental impact, climate change and natural disasters
Improved basic health
Protected human security and freedom from violence
Saving of lives and maintained human dignity
Sida is undertaking a number of major projects using guarantees in partnership with
Gates Foundation, USAID and others with focus on vaccinations, contraceptives and volatility of aid pledges. Also some PPDP, such as school milk in Zambia for improved nutrition. Sida is requested by the Government
(2013) to develop a challenge fund for sexual and reproductive health.
Innovation for Peace, a CF with GIZ in
Colombia
African Risk Capacity
Innovative financing well established internationally as elaborated earlier. Sida has a more limited application so far. New instruments being developed exemplified in this report. Scope for considerable expansion. Options mainly for regional and/or global approaches in multi-donor initiatives.
Application of innovative financing well established, especially for vertical, global programs.
Need for strategic thinking of new applications
As above
Does innovative finance have thematic limitations?
One interpretation of the differences noticed above, is that the applied instruments are better suited for certain themes than for others. In health and in economic growth for employment, guarantees, private-public funds and challenge funds are already being used quite extensively both internationally and by Sida. The reason is that the instruments can work directly with the private sector and compensate for market failures, provide support in financing with commercial capital is scarce, reduce risk, etc. Another reason is that a key dynamic player in aid, Gates Foundation, has made health its core business. The international experience is also in the environment and in efforts to mitigate climate change, innovative financing is commonly applied, but less so by Sida. There is an opportunity to expand more into climate change.
Access to basic education is a theme that Sida does not seem to apply innovative financing mechanisms to any extent in spite of the fact that a large percentage of education in developing countries are carried out in the private or quasi-private sector. Sida might seek new partners in this field, and more systematically pursue the application of innovative instruments in order to leverage ODA funds, which go into basic education. KfW might be such a partner.
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In the balance of the thematic areas for new Swedish development assistance, such as democracy, human rights, equality and human security, there has been limited application of innovative financing instruments by Sida. To a certain extent this is systemic issue: the instruments are less well suited as the themes are not ‘market-based’. However, it may also be a question of efforts to design the instruments to fit such themes. There are exceptions:
Sida is, for example, applying challenge funds to find models to promote peace using the private sector as in the Innovation for Peace in Colombia, and to promote democracy and human rights, the USAID-Sida Challenge Fund Making All Voices Count . PPDP projects with a focus on multinational companies’ CSR work can have considerable elements of human rights approaches. (An interesting project of this nature, providing female textile workers with a hotline against abuse, was being developed in cooperation with HM in
Bangladesh, but was rejected by the Embassy). In terms of partnering with philanthropic funds, the opportunities for innovative financing also in themes such as democracy, peace and human rights, should be considerable.
Integrating innovative finance in country results-strategies
It is a considerable challenge for the Embassies to systematically and creatively consider whether guarantees can be applied effectively to address some of the objectives in the strategy, or whether challenge funds, PPDP, output-based aid or other mechanisms are suitable. For the Embassies to effectively do so, the staff must be familiar with these instruments, understand what they can achieve, but also their complexities, risks and shortcomings – as well as have access to internal experts. Without that knowledge or access, there is a risk that the tools are suggested more in response to a pressure to be
‘innovative’ than an analysis of what is appropriate or not. Different models for transmitting such know how are being suggested in Sida such as manuals, help desks, case studies, information campaigns, training and so on.
The argument is not that each Embassy should have specialists on all forms of innovative financing instruments. There is a need to keep the technical key competences central.
However, Embassies must have sufficient know how to identify opportunities and knowing when to call upon and receive central support to develop projects and programmes technically.
In line with the initial discussions with Sida when the gap analysis began, we are not going into detail how Sida should organise itself in order to fully utilise the innovative financing instruments in the results-strategies. This should be one of the subjects of phase 2 of this work.
A tentative model how Innovative financing can be used in a country resultsstrategy – the case of Tanzania
Below is an idea how Sida’s current innovative finance instruments might be applied in
Tanzania’s new Results-strategy. We have chosen Tanzania among the country resultsstrategies as it was one of the first such strategies established and it is also the largest program:
49
Results strategy for Tanzania 2013 – 2019 31
Budget frame SEK 5,5 billion
Options for innovative finance Expected results in the strategy
Access to safe and sustainable energy, with the ambition that at least 300,000 persons get access to electricity
-Guarantees in private infrastructure (energy) development?
-Opportunities in PIDG?
-Challenge fund to develop new energy systems for rural areas?
-PPDP in energy supply with relevant private supplier?
-OBA in energy supply?
-Cooperation with Swedfund for energy investments in Tanzania?
Developed agricultural markets in order for poor people, especially women, to get jobs
Improved security in land-rights for smallholders and investors
Increased number of children to get access to basic skills in school
-Engage in private-public funds aimed at the agriculture sector such as AAC?
-Special window in AECF for Tanzania agro-businesses?
-Engagement in SAGCOT?
-Guarantees for large-scale agriculture investments such as Eco
Energy?
-Cooperation with Swedfund for agricultural investments in
Tanzania
-PPDP with investors in large-scale agro-businesses to address landright issues?
-OBA in supply of primary education?
-PPDP in private schooling with relevant enterprises?
-Advance Market Commitment for development of innovative educational material to suppliers?
Increased number of young people undergoing vocational training with the ambition that at least 10,000 get jobs
Increased opportunities for women and young people to start and manage productive businesses
Increased capacity and reduced corruption in the Tanzanian administration
Strengthened capacity in the civil society to demand accountability and increased knowledge about human rights
-PPDP with relevant Swedish companies such as Scania and Volvo?
-Explore other major employers and their needs in vocation training for new PPDPs?
-Guarantees for private investors in vocational training?
-Challenge fund for seed capital start-up companies by female entrepreneurs and youth (linked with training)?
-Cooperation with Swedfund for seed funding?
All voices count, Challenge fund with USAID. Option for special window for Tanzania?
-Challenge fund aimed at civil society organisations with best ideas on how to promote accountability and human rights?
-Loan and/or guarantee for media development?
It should be stressed that any innovative financing model should not be applied for its own sake, but on its merit in comparison to or in combination with alternative instruments. The underlying reasons for innovative finance must be kept in mind: as a means of leveraging additional capital to ODA; as a means of bringing in new players to address development issues; and as a means of doing things more effectively and getting better value for money.
31 In official translation from Swedish
50
7 FURTHER STUDIES
The Terms of Reference for the present study includes providing issues for further investigation in a second phase. The second phase would allow Sida to prioritise and operationalise its role as a relevant innovative development partner in the field of development finance. Below are some suggestions:
Undertake an in-depth international review of innovative finance, and especially review what leading donors are thinking and planning in this respect, including agencies such as DFID, KfW, DGIS and USAID.
Review the priorities of new entrants in innovative finance such as social impact investors and foundations and identify additional strategic alliances.
Review the guarantee portfolio risk and its management as well as the issue and pricing of risk.
Review how Sida can transfer its institutional knowledge and the use of innovative finance more systematically from the centre to the Embassies, providing required technical backup and procedural support.
Review how Sida can increase its effectiveness in transforming the use of innovation in development finance to more ‘standardized products’ in order to scale up the application of these instruments.
Review whether Sida should be permitted to make direct investments as has been requested and the consequences this would have in the Swedish development system in relation to Swedfund
Review the possibilities to provide guarantees of bonds issued on local capital markets, possibly in collaboration with GuarantCo.
Study whether a structure could usefully be developed where Sida (AAA-rated) guarantees would be combined with loan or guarantee products issued by recipient countries or sub-regional banks/institutions, which have a non-investment grade rating, in order to create possibilities for them to raise funds on international capital markets.
Make active efforts to work with Swedfund and with the Swedish pension funds.
Review how Sida effectively could interact with major capital flows to development countries, such as remittances.
ANNEX 1: TERMS OF REFERENCE
In separate document
ANNEX 2: DETAILS OF THE SIDA INNOVATIVE FINANCE
CASES
THE GLOBAL HEALTH INVESTMENT FUND (GHIF)
Issue addressed Only 10 % of the research on global health is devoted to tropical diseases while tropical diseases are 90 % of the burden in terms of population affected in the poor countries. Essentially, pharmaceutical companies are disinclined to invest in R&D in products where the potential commercial return is limited as the purchasing power of the potential clients is extremely low. At the same time, as the problem is related to global public goods, no one government has the incentive to provide funds for the high development costs.
There are a large number of potential medical innovations that are kept on hold due to the cost of late stage clinical trials. Such trials require resources that far exceed charitable funding capacity and traditional aid programs. During this period the investable funds should applied to various companies in the medical field that take promising vaccines through the costly clinical trial phase to a market where poor people suffer from tropical diseases.
The structure: GHIF is structured a not-for-profit trust set up as a private for-profit charity fund. None of the funds available to GHIF are invested as equity capital. These investable funds are partially guaranteed against loss. The Gates Foundation is the Lead Guarantor of
GHIF who is the beneficiary of the Gates Foundation guarantee. Sida is providing a coguarantee, channeling its ten-year partial risk guarantee through the Gates Foundation. The
Gates Foundation covers the first-loss risk of 15 % of the total investment and Sida has guaranteed the second loss risk of 5 %. There is third loss tranche of 40% that is shared paripassu between Sida and the Gates Foundation (3/8 th
and 5/8 th
thereof respectively). The remaining 40 % of the risks are uncovered by the guarantee and will be assumed by the market, be it patient and institutional investors as well as producers of pharmaceutical products. The Gates Foundation may dispose of its commitment to other interested guarantors but will always have to retain 5 % of total investment.
GHIF targeted a fund of US$80 million, but on the strength of the guarantees, it was able to raise a total of US$108,9 million. The funders include two U.S. and one British company
(Merck, Pfizer and GlaxoSmithKline), two pension funds (Storebrand of Norway/Sweden and
Axa Group of Switzerland/France), one British charitable organisation (Children’s Investment
Fund Foundation), Grand Challenges Canada (funded by the Government of Canada), IFC, JP
Morgan and the Gates Foundation. KfW of Germany has also provided a grant to the not-forprofit fund.
The investors will receive their return in two ways; i) the production of the new products are projected to provide the investors a sufficient return to justify the investments and ii) the pharmaceutical companies would get their return through royalties or sale of products on
OECD markets and iii) the institutional investors will get their return through loan interest and repayments.
Governance:
Lion’s Head, a British company specializing in advisory, financing and asset management services and with an extensive experience in Africa, is the Investment Manager.
Lion´s Head was part of the team responsible for setting up the International Finance Facility for Immunisation (IFFIm). The governance structure includes a Charitable Oversight
Committee including independent experts from industry. This Committee has a veto power
over all investment proposals made by the Investment Manager and the Investment Advisory
Committee giving priority to the social impact objectives when it comes to using GHIF resources than any commercial gains that can be obtained from the fund.
Partners:
In addition to Lion’s Head as the Fund manager, the Gates Foundation and Sida are the principal partners in the GHIF private-public partnership and have provided guarantees of
US$60 million. The public investors (governments and DFIs) have made US$30 million available in cash for investments to which pharmaceutical companies and pension funds have added US$25 million and US$12 million respectively. The remainder of the funds comes from large and small charitable contributions ranging from US$250,000 contributed by a number of high net-worth individuals to US$20 million from the Children´s Investment Fund.
In total, there are 32 investors in the first close of the fund.
Time frame: The term of fund and the guarantees is 10 years from December 2013 with a possible extension of up to 2 years. A key aspect in managing the fund is that these company investments take place early in the investment period. In this way, they can be brought soonest to a commercial stage so that the investors can exit (profitably) and the concept can be demonstrated such that new capital can be solicited for a possible follow-up fund.
Lion’s Head is actively working on finding off-takers of investable funds. Investment decisions have been made in respect of three projects: a hypodermic syringe project (based on compressed air), a project which includes a new method of testing HIV prevalence and a project which may produce medicine against diarrhea. These have all developed by start-up companies based on new technology that is aimed at extensive use in poor countries. (Their potential use in rich countries is limited.)
Financial commitments and returns: The fund has been closed with all guarantee and investment commitments have now been made. No specific return target has been set. A preferred return was initially set at 2 % which was acceptable to charitable investors but which was insufficient for the commercial ones. The split of the financial returns are 80 % for the benefit of investors and 20 % to the Investment Manager as a carried interest (or success fee). The pharmaceutical companies in which GHIF has invested will receive their return through royalties on product sales on markets within OECD and other rich countries. The other investors receive their capital with interest at exit.
Sida guarantee fees have been set in line with the project´s social orientation. They will receive a commitment up-front fee of 0,25 % and a yearly utilization fee of 0,1 %. A substantial amount will in addition be paid from grant funds into the guarantee reserve to cover the substantial risks involved.
Sida´s role:
The original fund idea came from both the Gates Foundation and Sida based on their common commitment to address fundamental health problems. JP Morgan structured the fund from the concept stage toward presentation to institutional investors, DFIs, donor agencies and charities. Sida was fully involved in the designing of the innovative guarantee scheme.
Risks and risk mitigation: The principal risk is that the Investment Manager will be unable to find companies and projects that address the fundamental health problems and produce propoor affordable products and at the same time be profitable within a reasonable time horizon.
There is a solid pipeline of candidate projects that has been provided by the Gates Foundation and others. However, there are substantial challenges involved in bringing candidates over the various hurdles into a stage when they can deliver a return. Selecting participants with sufficient expertise and competence to select projects and assist in supporting their
management to develop mitigates this risk. However, it is expected that the portfolio will ultimately contain both success and failures.
Innovative features
This is the first Research & Development investment fund dedicated to addressing poverty and health goals enshrined among the Millennium goals
A unique combination of aid, private capital and philanthropy working together with the shared objective of developing life-saving technologies in a financially sustainable way
The use of the guarantee arrangement and loss coverage to mobilise funding from private sector investors. By taking the second and third loss positions in the waterfall arrangements Sida has been instrumental in crowding in substantial private capital from multinational companies, pension funds and DFI sources
Sida affords high priority to the health sector and has much experience in providing flexible guarantees covering commercial and political risks while the Gates Foundation and Lion’s Head had advanced ideas and substantial resources geared towards sourcing and developing cutting-edge technology in the health area
A 10 year time frame (with an option to extend it for two year) allows for a sufficient time span for investors to commit funds and for results to be obtained for new medicine and medical appliances
There is potential for replication. Investment in the fund exceeded targets demonstrating that there is a potential source of funds for this type of investment. Depending on the lessons learned, there might be scope to upscale it through a new fund mechanism but with reduced funding from aid agencies, including needs for Sida guarantee. There are also possibilities to replicate it in other sectors (e g education).
THE PLEDGE GUARANTEE FOR HEALTH (PGH)
Issue addressed: Donor agencies - be they multilaterals, bilaterals or civil society organisations – make financial pledges months before they can process the disbursement is made for a variety of reasons. The time span and timing volatility between pledges and actual agreements creates serious problems and increases costs for beneficiaries. If the goods or services are not provided in time for a rainy season or to avoid stock outs, this has implications on the health of the targeted population. And, to get the goods there in time, costly logistics, such as airfreight, are used which takes away from funding for the good themselves. The uncertainty of timing of payment causes suppliers to raise the price to hedge against the possibility of payment problems, production schedule uncertainty and inventory management. The magnitude of this problem is significant: A Brooking Institution study in
2008 indicated that up to 28 cents of each donor dollar is lost due to the volatility of aid.
Consequently, improving the financial efficiency of these funds could benefit many more poor people.
The issue of predictability of aid fund disbursements exists in all sectors. However, the effects of delays may be very serious in the health sector as in situations of emergency delays may cause death or serious calamities among poor segments of the population.
Structure: The financing process, in summary, will work as follows: A health ministry would approach PGH with documentation confirming a donor pledge of funds. PGH would issue a payment guarantee to a commercial bank operating in the country against which the procurement agency may get a working capital loan and open a letter of credit in favour of the
supplier. Once the aid pledge can be disbursed, the donor pays to the bank. The role of the
Finance ministries is to commit their governments to honour the working capital loans once the donor pledges have been translated into disbursements.
The working capital loans will be secured by the availability of a US$100 million revolving line of credit from one or more commercial banks to be obtained by PGH. These lines of credit are secured by guarantees provided by USAID and Sida totaling US$50 million. The
USAID/Sida guarantee is on a 50/50 pari-passu basis and is constructed as a portable first loss guarantee thereby reducing the risk for the participating commercial banks.
All IDA countries are eligible as well as some Global Fund countries to use PGH. In terms of commodities PGH will focus on a limited number of drugs connected to malaria, tuberculosis and HIV and those, which are important for improvement of the maternal and child health.
An initial country focus will be developed where there is donor in depth involvement and where their know-how of and experience from the governments systems are good and well documented.
PGH will not make an independent assessment of the procurement agencies but will rely on donor systems approvals and that the procurement will follow Standard Procurement principles and thus be transparent and not subjected to corruption.
All the agreements were signed in 2013 and the arrangement is operational from Sida´s point of view. A pilot project was tested in that PGH has negotiated lower prices of essential health commodities with six major suppliers. With Merck/MSD a price reduction of 50 % has been negotiated in respect of a Hepatitis C mitigating drug, still under patent and essential for the
HIV-positive population in Ukraine. A financing facility made available by the Global Fund has been utilized in this deal. A similar transaction has been carried out for the Philippines.
Time frame: The guarantee supporting the revolving facility from the commercial banks will be for 5 years. As the working capital loans are short-term (less than one year) the donorguaranteed loan (and the guarantee support) is expected to revolve several times thereby generating up to US$1billion of transactions over the guarantee period. The relative long time frame is also required as the learning curve for all participants in the scheme is expected to be steep.
Organisational structure/Governance: PGH was established by the United Nations
Foundation with Global Fund support using funds from the US$1 billion US$ contribution from Tim Turner, the founder of CNN. The ultimate beneficiaries will be patients suffering from tropical diseases who will receive needed medicine in time and at a reduced cost. After a two year proof-of-concept, the United Nations Foundation gifted PGH to a newly formed notfor profit corporation called Financing for Development (F4D). The principal donor partners and guarantors (USAID and Sida) will sit on PGH´s advisory committee of F4D and PGH, which will monitor the operations of the facility. F4D/PGH has several high-level advisers supporting their efforts.
Partners: USAID, through its Development Credit Authority (DCA) and Sida through its
Loans and Guarantee facility are the partners on the donor side. The scheme requires no direct link with the recipient countries or with those donors who will be indirect beneficiaries by being in a position to have their assistance pre-financed and moved faster into the field. While not partners in the scheme, The Ministries of Health in recipient countries as well as government procurement agencies and Ministries of Finance are key stakeholders.
Finance and returns: The UN Foundation funded all the preliminary work including legal work to put the PGH facility in operation and to build the system. USAID had already tested
the concept (using a World Bank pledge) through its funding of two pilot projects in Zambia, where bed nets were delivered in time before the malaria season started and in Ethiopia.
Sida charged a risk-based premium by setting grant funds for part of the premium and transferring it to its guarantee risk reserve. In this case, US$0,8 million is set aside while PGH will pay a premium of US$0,5 million to Sida.
Sida´s role:
USAID initiated this programme, tested the system in two pilots and then approached Sida as their first choice and equal partner based on the long-term working relationship between the agencies. The collaboration on this project is not expected to make substantial demands on Sida´s limited staff capacity, particularly as the programme is run by
F4D.
Risks and risk mitigation: Nothing like PGH has been developed to date. Identified risks include understanding the processes of getting pledges to disbursement and how the different countries’ procurement agencies meet their obligations to effect the disbursements in addition to their handling of bank funds. PGH is a start-up organisation with all of the challenges associated with building an operating company. They have limited working capital and operating income, as the donors have provided very limited funds; therefore, their capacity to perform and execute transactions is a significant risk factor. In addition to commercial risks, there are also political risks involved when so many countries are involved.
A challenge for USAID and Sida to reduce the risk will be to provide technical assistance for the implementation phase to help PGH and other actors to manage the learning curve.
Moreover embassy staff in a number of countries needs proper training to be able to disseminate the system and participate pro-actively in a dialogue with all actors.
Finally as a new product, it should be recognized that there are potential risks and challenges that may not have been envisioned at the design stage.
Innovative features
PGH addresses a major funding problem between donors and recipient countries – the volatility and timing of aid flows by offering a solution to improve the financial efficiency of funds flows.
Using commercial lenders to assume the risks of donor pledges have not been done before
(except for limited pilot schemes by USAID)
The USAID/Sida guarantee will crowd in a commercial bank that will assume an uncovered risk of 50% of their loan amount on a revolving basis over a five-year period resulting in leveraging the guarantee funds. The program is projected to generate transaction volumes of US$1 billion.
There are potential efficiency gains to be made by bundling transactions and making purchases in bulk benefiting several poor countries
A new kind of partnership among donors will be created by two donors taking risks on other donors´ pledges
The guarantee creates a “soft power” to incentivize donors to disburse funds quickly and the recipient countries to do what they have agreed to do.
If successful there would be several possibilities of scaling up and replicating the scheme:
(1) pledges by more donors could be covered; (2) the scheme could see an increase in the guarantee volume with lower risk coverage by the principal donor agencies; (3) other sectors (e g education, agriculture or emergency relief) could benefit from similar schemes and (4) potentially a new line of business for commercial banks could emerge once they understand the risks of lending against donor pledges.
AFRICAN RISK CAPACITY INITIATIVE (ARC)
Issue addressed: Serious droughts affect most African countries causing loss of lives and livelihood for poor people. Each country has to use whatever resources available to it to mitigate the effects of the drought and to get back on a positive socio-economic trajectory.
The response of the donors (including aid organisations or NGOs) has been to provide catastrophe aid and humanitarian assistance. The objective of the African Risk Capacity
Initiative (ARC) is to create a stand-alone pan-African risk pool through which the countries can insure themselves against the escalating impact of weather events. Thereby an affected country will get more immediate payments to assist in the alleviation of the consequences of the calamity. The new type of insurance being introduced by ARC is based on the assumption that it is unlikely that disasters occur simultaneously in several countries on the continent. The system will be based on weather information covering a 30-year period integrated into the
Africa Risk View software developed by ARC to which is fed regularly rainfall data measured by satellite.
The structure/project design: The African Union has with the assistance of World Food
Programme (WFP) created ARC Ltd as a sovereign-level mutual insurance company, registered in Bermuda and governed by the ARC Agency, where all member states have a seat. The governance of ARC Ltd is carried out by a Board of directors, chaired by the former
CEO of IFC and with representation from reinsurance companies. The states are invited to participate and commit themselves to paying annual premiums to the risk pool. Twenty-four countries have signed the protocol and are moving slowly towards its ratification. Six countries (Kenya, Malawi, Mauretania, Mozambique, Niger and Senegal) have already ratified the protocol and are prepared to take out insurance covering the 2014 agricultural season. The success of ARC as a political instrument of solidarity and more narrowly as an insurance system is based on additional countries joining.
The trigger for payouts will be rainfall above certain predetermined levels. The amounts of the payout are based on the premium paid and the level of risk (self-insurance) that the countries want to retain. In other words, how much they want ARC to pay for droughts of various degree of severity. The system is designed to be transparent. Countries are committed to having the seriously affected part of the population become the beneficiaries of the payouts.
Several donors have participated in the design of the insurance scheme, including DFID,
Swiss Development Corporation and IFAD. Sida has been the second largest financial contributor in the design phase, having committed US$11.5 million to the ARC Agency. Sida will continue to support WFP in the early operational phase and provide assistance to capacity building aimed at improving the risk management systems.
Partners and timeframe : Donors are invited to contribute to ARC in the early start-up period in 2014 and 2015. KfW has announced its commitment of EUR 50 million that will be in the form of a non-interest-bearing conditional loan to be paid into the common risk pool. It is expected that DFID soon will announce a similar contribution to the pool. Annual premiums from the countries of approximately US$3 million will be added to the pool in order to endow it with sufficient liquidity during its initial period. The risk capacity of ARC could be increased further by reinsurance arrangements, whereby part of the ARC risks would be transferred. There is definitely a market potential here which remains to be exploited by ARC.
Sida’s potential role:
Sida has been invited to use its guarantee instrument to provide a risk cover by reinsurance along with private sector reinsurers. Ideally Sida´s participation would crowd in insurance companies and add a substantial leverage for the insurance pool. The guarantee could be construed as a partial risk guarantee where Sida’s guarantee would be provided pari-passu with some reinsurers, possibly allowing others to provide a less risky
position. The pricing of the risk coverage still needs to be agreed. Sida has retained an actuary to assess the risks connected with the intervention and has got a price level established.
Ideally reinsurers using the same data would arrive at a similar level. However there is no established, transparent market for this type of risk. The market is oligopolistic with few companies competing and it is very volatile. Sida approach is to arrive at a level, which is affordable to ARC and covers the full guarantee period (5 years) but does not have a market distortion effect. Sida would be prepared to subsidize the premium and has decided that 30 % of the estimated risk premium would be a reasonable level taking into account all uncertainties involved in the actuarial calculations. ARC has argued that the premium calculated at that level would be too high at this stage and would in the short run price Sida out of the (imperfect) market.
The exploratory discussions on how to best apply the Sida reinsurance offer continues. As long as there are only six member countries who have become contributing members of ARC, the KfW and DfID capital injections would be sufficient to open up for providing insurance coverage. However by 2015 a demand is expected to exceed the coverage provided by the pool and additional capital would be needed. Sida has declared that it stands ready to participate and to join the reinsurance pool. The objective is still to find a non-discriminatory and non- market distorting application of its guarantee instrument that will be applied to payouts once the ARC retention layer has been depleted.
Risk and risk mitigation: This is high-risk guarantee based on an untested idea. The risks are based on non-financial events which are out of the control of the parties and which have few if any ways to mitigate the risk and of paying out the guarantee. While the risk analysis is based on 30-year weather data, it is unknown how reliable the assumptions are relating to climate change factors and global warming effects in Africa and elsewhere. Balanced against the risk is the value of the guarantee, which would mitigate serious risks affecting their food security. And from a donor´s perspective this system, if working effectively, will substantially reduce the “risk” of having to provide substantial humanitarian aid after droughts have occurred.
Innovative features:
Establishing a pan-African mutual insurance system against drought is by its very nature highly innovative. Internationally there is only one model with similar features, the
Caribbean Catastrophe Risk Insurance Facility (CCRIF)
The assumption of risk by African countries assume responsibility for disasters in neighboring countries would be a new feature
A drought insurance instrument owned by affected countries as an important complementary instrument to humanitarian assistance provided by Sida through international channels or Swedish NGOs
The early nature of the ARC interventions would prevent unsustainable use and depletion of natural resources which follow in the wake of natural disasters and the reallocation of resources needed for development to short term use
The objective to crowd in international reinsurers to take substantial risks on an uncertain market at an affordable price
ANNEX 3: SOME ASPECTS OF INNOVATIVE FINANCE
INTERNATIONALLY
The review of the international scene in innovative financing in this study has not been extensive, but merely scratched on the surface. One of our recommendations is that Sida should undertake a more in-debt study in the application and learning in innovative financing by various agencies, donors, FDIs as well as private agents such as philanthropic funds and also impact investors. In this section of the report we highlight four aspects:
Some cases of well-known innovative financing mechanisms often discussed in the discourse of the subject.
Green bonds as a specific innovative mechanism
Three selected projects which Sida is not a part of and which are of a different character than what Sida engage itself in.
The application of innovative finance in three dynamic development finance institutions.
International cases highlighted in the debate
A number of innovative financing mechanisms are typically highlighted in the international discourse on the subject. Recent reports by OECD, UNDP and the World Bank highlight, for example, the following projects and models.
GAVI Alliance (formerly known as the Global Alliance for Vaccines and Immunisation) established 2000 on the initiative of the World Bank and Gates Foundation was a new type of public-private partnership, funding major disease-fighting campaigns in developing countries.
Since its launch, the GAVI Alliance has contributed to the immunization of an additional 370 million children, helping developing countries prevent more than 5.5 million future deaths from various diseases such as hepatitis B, polio, and yellow fever. Currently 67 countries support GAVI. Sweden was one of the original six donor countries and has contributed about
US$ 380 million to GAVI 2001-2015. The Gates Foundation alone has contributed US$ 1.5 billion to GAVI. See further www.gavialliance.org
International Finance Facility for Immunisation (IFFIm) was launched in 2006 by six donor governments (United Kingdom, France, Italy, Spain, Sweden and Norway), to raise money by issuing bonds on international capital markets, specifically for immunization programs. The IFFIm repays private investors over periods of up to 20 years with the longterm ODA commitments of donor governments. This arrangement effectively allows governments to ‘buy-now but pay later’ or ‘frontload’ ODA. The majority of resources have been channeled into GAVI. IFFIm benefits from US$ 6.3 billion in donor contributions over
23 years from the governments of the United Kingdom, France, Italy, Norway, Australia,
Spain, The Netherlands, Sweden and South Africa. IFFIm finance is expected to prevent some
5 million child deaths between 2006 and 2015, and more than 5 million future adult deaths.
See www.iffim.org
The Solidarity levy on air tickets was launched in 2006 by the Governments of Brazil, Chile,
France, Norway and the United Kingdom. It is paid by individual air passengers from the participating countries when they purchase their ticket and airlines are responsible for collecting and declaring the levy. 17 countries have since the start joined and several are in the
process of joining. Most of the resources raised through the airline ticket tax are channeled into UNITAID (see below). Sweden is not part of this initiative.
The Advance Market Commitment (AMC) for pneumococcal vaccines was launched in
2007 by Canada, Italy, Norway, Russia, the United Kingdom and the Gates Foundation. AMC aims to accelerate the development and availability of a new pneumococcal vaccine. Donors have committed US$1.5 billion to guarantee pharmaceutical companies the price of vaccines.
These financial commitments provide, in turn, a new incentive to vaccine manufacturers to develop a product that might otherwise not be commercially viable and to produce it the scale necessary to meet demand in developing countries. In exchange, pharmaceutical companies sign a legally binding commitment to provide the vaccines at an agreed price.
Product (RED) is a scheme by which consumers purchase items branded Product (RED); producers donate 50 percent of profits on that item to the Global Fund to fight HIV/AIDS. The initiative was taken by the singer Bono in 2005 and has attracted multinational companies such as Nike, Apple, American Express, Gap and Hallmark. Since its launch, (RED) has generated over US$250 million for the Global Fund and over 40 million people have been impacted by HIV and AIDS programs supported by (RED) purchases. See further www.red.org
The Global Fund to Fight AIDS, Tuberculosis and Malaria was created in 2002 on the initiative of the UN to dramatically increase resources for the fight against the three pandemics. It spurs partnerships between government, civil society, the private sector and communities living with the diseases. The Global Fund does not manage or implement programs on the ground, relying instead on local experts.
Debt2Health agreements, under which the (official) creditor agrees to forgo payment of a portion of interest and principal on the condition that the beneficiary invests an agreed amount in health via the Global Fund. To date, four Debt2Health agreements have been concluded.
They involve Germany and Australia as creditor countries and Indonesia, Pakistan and Côte d’Ivoire on the beneficiary side.
UNITAID, a French initiative, was founded specifically to channel resources into treatment and care for those affected by HIV/AIDS, tuberculosis and malaria. UNITAID derives around
70 percent of its income from the international solidarity levy on air tickets. Since inception,
UNITAID reports that it has raised close to US$2 billion in resources to help provide treatment for approximately 47 million people worldwide.
The Gobal Digital Solidarity Fund , an African initiative jointly with France was established in 2003. under the Fund public institutions and private companies are urged to donate one percent of the value of an information and communications technology (ICT)-related contract to the Global Digital Solidarity Fund which is intended to reduce the digital divide between developed and developing nations. Sweden is not a part of the Global Digital Fund.
The Clean Development Mechanism (CDM ) allows a country with an emission-reduction or emission limitation commitment under the Kyoto Protocol to implement emission-reduction projects in developing countries. Such projects earn saleable certified emission reduction
(CER) credits, each equivalent to one ton of CO2, which count towards meeting Kyoto targets.
A two percent levy on carbon credits generated through the CDM is channeled in turn to the
Adaptation Fund which finances climate adaptation projects and programs in developing countries that are parties to the Kyoto Protocol. As of 2011, the Adaptation Fund had funded
11 projects in developing countries totaling approximately US$70 million.
Caribbean Catastrophe Risk Insurance Facility (CCRIF)—the world’s first regional insurance fund - was establishment in 2007. The CCRIF offers index-based insurance— insurance under which payouts are based on an objective, local index (such as one tracking earthquake data or hurricane wind speeds) that serves as a proxy for actual loss. Donors provided start-up funds, and the World Bank later arranged a US$20 million reinsurance that transferred a portion of risk to capital markets. By pooling their risk, the 16 member countries have saved about 40 percent compared to premium costs had they negotiated individually on commercial markets.
In addition to these specific projects, there is also a discussion in the literature of innovative finance of a more generic form:
Local-currency bonds Development assistance in low-income countries has traditionally been denominated in the currency of the donor country, which has risks for borrowers (for example, currency fluctuations make it difficult to forecast debt burdens and plan for future expenses) and can make potential investors wary. World Bank Group financing is helping to build up capital markets in many low-income countries: from 2000 to 2008, for example, the
Bank Group committed the equivalent of more than US$5.7 billion in local currency financing in 31 countries.
Diaspora bonds refer to a debt instrument issued by a country or a sovereign entity aiming to raise funds through its overseas diaspora. India and Israel have been at the forefront of diaspora bond initiatives and have raised over US$35-40 billion using these bonds.
As noticed above, there is a predominance of health-oriented mechanisms, both in terms of design and of channel of funds for use. Over the last few years, a number of innovative mechanisms have also emerged in climate and renewable energy. One reason for the former could be that health-related issues feature high among the eight MDGs (being 3 of the 8 objectives), and that innovations in the health sector, such as vaccinations, tend to have global consequences. Hence, the impact of a break-through can be very considerable. However, another reason might be that one of the most dynamic new players in development assistance, the Gates Foundation, has health as its first lead priority. Swedish aid has had a similar orientation in innovative financing, not least through Sida’s association with the Gates
Foundation.
Another explanation for both health and energy sectors driving a growing number of innovative mechanisms could be the public-private nature of these sectors. Both require the participation of private capital and commercial players to build power plants and develop vaccines. Both sectors also represent essential public goods and basic services necessary to enable shared and sustainable economic growth.
Green Bonds
Green bond is versatile instrument of growing popularity. Green bonds are well-known in the
Swedish market among pension funds as well as municipalities, but to date have not been included in Sida’s portfolio. Green bonds or sustainability bonds effectively provide repayable capital for large infrastructure or other upfront costs. Bonds are issued in the capital market, often to longer-term investors such as pension funds. Fixed-income securities from a government-backed or AAA rated issuer represent no risk to investor. In some cases green
bonds have also been associated with tax breaks, such as the tax-exempt Green Bonds issued by the Commonwealth of Massachusetts.
Green bond issuance is on the rise. Through September 2013, approximately US$3.7 billion in green- or climate-labeled bonds were issued, an increase of more than 50 percent over the
US$2.43 billion sold in all of 2012. Approximately US$32 billion in MDB green bonds have been issued to date, largely to fund climate change adaptation or mitigation projects. About
US$7.5 billion remains outstanding due to maturities.
32
The primary issuers of green bonds have been multilateral development banks, such as the
World Bank, IFC, the European Investment Bank, and FMO. The World Bank issued its first green-labeled bond in 2008. The security was created by the Bank in partnership with
SEBanken. This Swedish bank is the largest issuer of green bonds and has sold US$4.0 billion to date.
Selected cases of Innovative financing projects
Below we present three international examples of innovative financing more in detail. In selecting the cases, we looked for mechanisms that (i) have a potential for replication, (ii) represent different instruments or combinations of instruments to illustrate the range of possibilities, and (iii) are innovative in the sense that they are first of their kind in their sector or specific use of instrument. We also made an effort to include sectors where Sida’s use of innovative finance has been limited to date, specifically agriculture /SME and energy. The three examples are:
The African Agricultural Capital Fund (AACF)
The Global Energy Transfer Feed-in Tariff (GET FiT)
The Green Africa Power (GAP) – a new subsidiary of the PIDG
African Agricultural Capital Fund (AACF)
Issue Addressed: To improve the livelihoods of smallholder farms in East Africa by primarily investing in agricultural small and medium sized enterprises that provide improved access to goods, services, quality employment opportunities and markets along agricultural value chains. The Fund's impact investment philosophy is to have both a strong financial return and significant social impact.
Fund Structure: The fund plans to invest in approximately 20 agricultural enterprises using debt, quasi-equity and equity – with an emphasis on self-liquidating structures in light of the limited liquidity and exit environments in the sector. Investment sizes will range from US$
200,000 to US$ 2,500,000.
AACF has a ten-year life, with an option to extend for an additional two years. It has investment periods of up to five years with an investment hold of five to seven years.
Organisation
32 http://www.breckinridge.com/pdf/whitepapers/Green_Bonds.pdf
Pearl Capital Partners (PCP), a specialized African agricultural investment fund manager that is based in Kampala, Uganda is the fund manager. PCP was the first and one of the few private investment managers in sub-Saharan Africa focused exclusively on growing small and medium-sized enterprises in the agriculture sector. It provides “hands-on” expertise into a sector that has suffered from under-investment. PCP's model focuses on building the skills of local management teams rather than infusing management expertise from abroad, making it a sustainable approach to investing on the continent.
The limited partners, the Gates Foundation (US$10 million), the Gatsby Charitable
Foundation (US$5 million), and the Rockefeller Foundation (US$2 million) contributed $17 million and J.P. Morgan's Social Finance Unit made a $8 million senior, unsecured commercial loan at a below market rate. USAID's Development Credit Authority is guaranteeing 50% of the loan. USAID, under the Feed the Future initiative, also granted $1.5 million to fund to assist in improving investee companies' operations, competitiveness, and access to markets.
Finance/Return : The targeted gross portfolio return is at least 15%. While potentially high for agriculture projects, this is significantly below private equity funds operating in Africa in the agriculture sector. The fund management fees are 2.5% with a 20% carried interest.
Risks:
The principal risk is that the Investment Manager will be unable to find companies and projects that meet the financial and social impact objectives of the fund as well as becoming profitable within a reasonable time horizon. Other risks included limited manpower, market risks such as the demand for and the pricing of commodity products and costs of inputs, etc.
The time consuming nature of working with emerging companies necessitates skills and manpower, which is a limited resource in the fund manager.
Innovative Features:
The development of portfolio-level social impact targets of improving at the lives of least 250,000 smallholder farmer households and helping them realize an increase of
US$80 in annual income within five years of an investment.
Social return less than that of private equity investors operating in the market
The use of the DCA guarantee to support a commercial unsecured loan to an investment fund
Focusing on early stage businesses where risk capital is needed and demonstrating that high long term investment returns can be generated
AACF has a unique hand-on focus, including establishing and maintaining a strong relationship between the lnvestee Company and AACF, through the provision of active and relevant business management expertise to improve business performance.
The Global Energy Transfer Feed-in Tariff (GET FiT)
Issues addressed : GET FiT is designed to leverage more private capital into renewable energy generation projects by addressing the following key hurdles for private investments in
the sector: low feed-in tariffs for renewable energy, high perceived offtaker risks, and lack of availability of long-term capital at affordable terms and conditions. The GET FiT Premium
Payment Mechanism is designed to make small-scale renewable energy generation projects
(between 1MW and 20MW in installed capacity) promoted under the Renewable Feed-In
Tariff (REFiT) system financially viable, thus enabling a large portfolio of projects to move to financial close and into implementation.
The Structure: The GET FiT Program Uganda consists of three key instruments :
1.
The GET FiT Premium Payment Mechanism . This is a results-based top-up on the existing Ugandan feed-in-tariff scheme REFiT. Both REFiT and the PPM are provided on a per-kWh-basis and are funded by Development Partners through KfW. GET FiT funds tops up the existing feed-in-tariff with calculated over a 20-year project lifetime.
The payment is results-based in the sense that 50 percent is paid out at completion of the plant, and the remaining 50 percent over the first five years of production. GET
FiT Premium Payments are additional payments per kWh, above and beyond the regulated REFiT tariff levels as published by ERA. Payments will be availed on a grant basis, following an open and transparent Request-for-Proposal process. All projects that hold a valid development permit from by the Uganda Elecricity
Regulatory Authority (ERA) and that are sufficiently advanced in project preparation
(e.g. feasibility study concluded) are eligible to apply under a Request for Proposal
(RfP) procedure. Projects will have to demonstrate that they (i) are financially and economically sustainable (including GET FiT support), (ii) are technically sound and
(iii) comply with IFC Performance Standards on Environmental and Social
Sustainability (2012). In addition, a comprehensive legal due diligence will be performed. Bids received on the basis of the RfP are appraised by independent qualified experts who make a financing recommendation to the GET FiT Investment
Committee. An Investment Committee with representatives from the donors and the
Government of Uganda makes the final decision regarding support from GET FiT.
Support under GET FiT is issued until funds are exhausted.
2.
Guarantee Facility through the World Bank . The Government of Uganda has requested the World Bank to explore the use of a Partial Risk Guarantee (PRG) mechanism for projects benefiting from the REFiT. The PRG will be used to facilitate the provision of short-term liquidity support (Letter of Credit from a commercial bank). This will provide greater certainty over timely receipt of payments that are due from the Ugandan energy utility company UETCL in line with the Power Purchase
Agreement (PPA).
3.
Private Financing Mechanism. Deutsche Bank - as initiator of the GET FiT concept
- is working with international and local commercial banks to facilitate project financing transactions. The terms and conditions reflects the improved risk profile of projects supported by GET FiT premium top up and guarantee mechanisms as well as the improved quality of business plan material following the review by the GET FiT public facility experts. The set-up of a dedicated fund vehicle to finance GET FiT projects only is not planned. There is no exclusivity for the Private Facility and private developers are free to approach other financiers for debt and equity financing
Timeframe
GET FiT was launched in Uganda in May 2013. The Program aims to fast track a portfolio of up to 15 small-scale renewable generation projects of a total of about 125 MW within the next
3-5 years. GET FiT is a pilot program and if successful, it the intention is to scale it also to other countries. This will help to add much-needed clean generation capacity, help to strengthen regional grids and result in emissions reductions of 11 million tons of CO2
After the first round, eight private renewable energy projects have been selected, which will add 78 MW or 482 GWh/ annually to the Ugandan grid within the next two years. After the conclusion of the on-going second round, it is expected to facilitate further private investment summing up to US$ 400m for the envisaged total of 150 MW.
Partners : GET Fit was developed by KfW in partnership with Deutsche Bank and is sponsored by the World Bank, the Government of Norway, Germany, and by DFID. The EU is considering additional support. The Premium Payment Mechanism is funded by Germany,
UK and Norway. Funding goes to KfW and then directly to private developers through a
Request for Proposal (RfP) process. The RfP process qualifies for Premium payments and selected developers are invited to apply for World Bank PRG Guarantees and Deutsche Bank financing as needed.
Finance : Norway has contributed EUR 17 million, the United Kingdom EUR 23 million and
Germany EUR 15 million to the Premium that is provided as a grant. Return on investments for project developers are not yet accrued, but all projects must demonstrate financial viability
(including the top-up) to qualify.
Risk and Risk mitigation
The main risk would be lack of proposals from private developers. The first Requests for
Proposals have already mobilized significant interest. Other risks would be related to income base of developers, either the base payment from the Ugandan utility, or the ability of project developers to attract necessary capital. The programme is designed to reduce risk for private developers and is tied to a strong commitment from the Government of Uganda, both through the national feed-in-tariff and through its official request for World Bank PRG Guarantees.
PRGs count 20 percent against a country’s IDA allocation hence puts a strain on other lending and constitutes a strong incentive for national utilities not to default. The Standardized PPA under the GET FiT program has been published by UETCL after approval through the relevant authorities. By streamlining the power purchase agreements, transaction costs for developers under the REFiT are significantly reduced, offtaker and regulatory risk mitigated and, private investment incentivized.
Innovative features
GET FiT can be considered innovative both in terms of leveraging funding from private developers, and in tying funding to results. The programme combines three instruments to address the totality of risks that typically prevent small-scale renewable energy projects from happening.
Green Africa Power (GAP), a new PIDG initiative
Issue addressed: More than 700 million inhabitants of Sub-Saharan Africa lack access to electricity. There is a shortage of all power generation projects in Africa, but particularly renewable energy projects. Pronounced market failures inhibiting the growth of renewables in
the region are i) lack of cost reflective tariffs; ii) high upfront costs that make projects less easy to finance, particularly when only short-term loans are available from local banks, and iii) specific risks e.g. of construction delays and off-taker payment default, deterring potential financiers.
Objective: Encourage renewable energy generation projects in Africa. It aims to address the barriers by:
reducing the upfront cost of capital, while maintaining overall commercial returns;
providing cover for specific construction phase risks; and
policy dialogue to move towards cost reflective tariffs.
Structure and Instruments: GAP will deploy two financial instruments and one policy instrument, each of which will be individually negotiated and tailored to fit the specific circumstances of the project.
1.
Quasi Capital: A tranche of long term capital which, in the event of insolvency, will rank junior to all other senior and mezzanine loans but above equity. It would have the key characteristic that a minimum coupon would be paid as soon as
Financing Agreements with other lenders allow but the remainder of the coupon
(to achieve an overall reasonable return on capital established on a project by project basis) and the capital repayment, would not be paid until a threshold IRR had been achieved by equity participants. If the project generates cash flows in line with expectations (see paragraph 3. below) then the effect of these terms would be to “back-end load” the cash flows received by GAP beyond the first few years of the project.
2.
Contingent Line of Credit: A guarantee that provides additional comfort to lenders on top of the debt service reserve account, to be drawn down in case of delays or cost overruns in construction.
3.
Policy Dialogue: GAP will encourage host countries to move towards costreflective tariffs, providing them with support to do so and buying them time to build political and public support for tariff increases. The offtaker and its government sponsors and regulators might agree a power purchase agreement
(‘PPA’) with a graduated rise in tariffs to the level required for the project to be viable, with the low GAP return enabling the project to achieve financial viability in early years. The additional cashflow in the later part of the PPA period would allow GAP support to be repaid and a reasonable return delivered, while allowing the developer to make a fair equity return, and supporting on commercial terms a conventional loan.
Organisation: GAP is structured like the other PIDG project-financing Facilities, as an autonomous legal entity managed under a contract with a private fund Management
Company. They expect to structure a diversified portfolio of economic scale renewable energy projects in the US$ 20-50 million range.
Dfid has committed £98 million to fund GAP through the PIDG Trust. Norway funded the feasibility work and is now in an advanced stage of considering an additional investment into
GAP.
Status: During 2013, the GAP Board, supported by an Executive Director has made substantial progress in setting up the corporate and management structure of the new Facility.
Additional Board members were appointed to provide a balance of financial and technical and
African backgrounds. At yearend, the Board had shortlisted four candidates. Selection is expected in the first half of 2014 with the fund being operational shortly afterwards.
Risk and Risk Mitigation:
The principal risk is that the Investment Manager will be unable to find companies and projects that meet the objectives of the fund and at the same time be profitable within a reasonable time horizon. The Board has identified, and has requested from candidate fund managers, is a pipeline of candidate projects.
Innovation Features:
Focus on developing projects and improving the enabling environment for renewable projects.
The form of financing provided is for early stage development costs and which is not available in the private market.
Innovative DFIs and Development Banks – three examples
Some institutions have demonstrated ability to work innovatively on an organisational level.
They are included in this review to demonstrate the value of a culture of innovation, where flexibility and versatility generates mechanisms that are not designed to be innovative as such, but that are able to find ways to address important obstacles, and to deploy new instruments or combinations of instruments effectively.
One development bank and two DFIs are described in some detail to make this point: German
KfW, Norwegian Norfund, and Dutch FMO. DFIs have pioneered a number of innovative approaches. From this, it could appear that DFIs are more innovative than their national traditional aid siblings. One explanation could be that DFIs already exist at the intersection between aid and markets, hence are familiar with both worlds. Also, they often have a more flexible mandate with less instructions on activities, sectors, and disbursements from their owners. Finally, DFIs typically dispose a broad range of instruments from grants and soft loans to market term financing and guarantees
FMO
FMO, the Dutch DFI established in 1970, is a public-private partnership, with 51 percent of the shares held by the Dutch Government, and 49 percent held by commercial banks, trade unions, and various private sector actors. This shared ownership gives FMO a stronger commercial profile than Norfund and Swedfund among others. FMO can raise capital and issue bonds in the capital market. FMO has a AAA rating with Fitch Ratings and AA+ from
Standard and Poor’s.
33 FMO is able to offer the full range of financial instruments. In its equity investments, FMO can also lower credit risk and accept a lower return in investments
33 FMO website: www.fmo.nl/about-us/profile
that take steps to improve Environment, Social and Governance aspects (ESG). This is a useful approach to stimulate ESG work while maintaining ESG as a core responsibility in company management.
Innovative financing is high on the agenda at the FMO and it is one of the main pillars in their overall Theory of Change strategy.
34
FMO does not operate with a single definition of innovative finance, but has integrated innovation in its approach to “tailoring the financial package to fit”. FMO is also discussing how to report on innovative financing. More systematic reporting and documentation could facilitate replication of innovative instruments across operations and sectors. FMO both develops its own instruments and supports others.
Examples of innovative financing include:
FMO developed the TCX, which later spun out to be its own entity. TCX hedges the currency and interest rate mismatch that is created in cross-border investments between international investors and local market participants in frontier and less liquid emerging markets.
35
FMO also initiated MFX solutions, which provide local currency hedging and advisory support. MFX is a socially-oriented company that supports lending to entrepreneurs in low-income countries with affordable hedging products and risk management education.
36
FMO issues sustainability bonds and green bonds . Bonds are issued to raise funds in the capital market for renewable energy and inclusive finance (typically microfinance through intermediaries). These bonds enable FMO to raise funds in the commercial market while investors take no credit risk. Investors in FMO sustainability bonds include pension funds, insurance companies and banks.
37
FMO currently provides higher disbursements (gross) then the aid agency, DGIS, and is as such unique in the international aid architecture.
KfW
KfW Development Bank is the development bank branch of German Kreditanstalt fuer
Wiederaufbau . It provides grants, soft loans, and loans and near-market conditions in developing and emerging economies. KfW combines ODA funds from the federal budget with KfW funds raised in the capital market bond offerings. Grants or loans on IDA terms are drawn from budget funds while development loans typically blend budget funds and loans.
Their main sector priorities include small and medium-sized businesses (SME), environment and climate protection, and health and social infrastructure.
Its combination of grant resources and KfW funds raised in the market with AAA rating provides flexibility to both (i) meet different country needs and (ii) to package blended financing structures.
34 Interview with Mr Huib-Jan de Reuijter, Director of Finance
35 https://www.tcxfund.com/
36 http://mfxsolutions.com/
37 http://www.fmo.nl/k/news/view/13829/179/fmo-issues-eur-500-mln-5-year-sustainability-bond.html
In the health and education sectors, KfW has extensive experience with voucher models that use market mechanisms to stimulate results in public services.
In the education sector: o A project in Ghana provides vouchers for vocational training to SMEs. SMEs can pick training providers from a pool of accredited training institutes – public or private. Accreditation is provided by local business councils and is subject to adherence to established standards and curriculum. o KfW has pooled resources with Equity Bank Group, the MasterCard
Foundation, USAID, and UKAid in the Equity Group Foundation. Through its
“Wings to Fly” programme, the foundation provides scholarships for high achieving students from needy families to continue schooling into secondary school. KfW is also supporting and exploring financing models to enable poorer students to access tertiary education, exploring student financing possibilities in partnership with universities
In the health sector: o KfW has a number of projects providing maternal health services. In the
Reproductive Healthcare Voucher Project (RHVP) in Uganda, poor women received vouchers for package of birthing services at clinics, services supplied by skilled medical practitioners. It also provided subsidized vouchers to couples for HIV/AIDS and other sexually transmitted diseases. For a small copay, beneficiaries can choose services from a list of accredited health providers. Accredited institutions benefit from training and technical support.
In addition, proceeds from the vouchers when exchanged exceed the actual service cost and can be used to upgrade clinics. The system was developed by
KfW in Uganda and is now funded by other donors, including GPOBA. It was awarded the IFC Smart Lessons award in 2012, and has also been rolled out in
Kenya. Lessons from the program are summarized here: http://www.gpoba.org/sites/gpoba/files/SmartLessons_RHVP.pdf
. A total of
137,964 vouchers were sold, including 106 306 Safe Delivery vouchers and
31, 658 STD vouchers. Vouchers were introduced for the first time in a healthcare context in the World Bank's Africa region. o In health, approaches to universal health care insurance are being explored. A programme functioning with the National Health Insurance Fund in Tanzania to include poor mothers and newborn children as beneficiaries and one project is currently piloted in Kenya.
Through partnerships on both sides of the public-private continuum, KfW also has unique and very successful experiences with structured funds . Structured funds enable packaging different sources of funding and risk level. Structured funds combine senior level tranches from commercial lenders, mezzanine tranches provided by development banks, and junior tranches by donors. The junior tranche would be the first to be drawn on in the event of a default and effectively serves as a risk cushion for the mezzanine and senior tranches of the fund.
Loans are issued to local commercial bank that constitute efficient intermediaries for Small and Medium sized enterprises (SME) or municipalities. These longer credit lines allow
smaller and often local partners to introduce new products, access new client groups, and enter new markets.
The Green Growth Fund is a case in point. Launched in 2009, the GGF is a structured fund with different risk tranches. The financial institutions KfW, EIB, EBRD, and IFC each participated with 25 million Euros in the so-called senior and mezzanine tranche of the fund.
The EU Commission and BMZ are is participating in a junior tranche with contributions of
38.6 million and 8 million Euros respectively.
Within KfW, efforts are made to systematically share experiences and scale up innovative approaches across sectors. Competence centers are in charge of this, and the Competence center on finance has been responsible for designing and advising on approaches to innovative financing in KfW.
Norfund
Norfund is the Norwegian Development Finance Institution. Norfund is 100% owned by the
Norwegian Government. Its capital base is replenished annually from the ODA budget.
Norfund provides loans and equity to businesses in developing economies. Norfund’s financing is on commercial terms but they have no specific revenue or return targets. They invest with a long perspective (typically ten years) and often provide equity. Loan or equity financing is accompanied by extensive technical assistance and technical as well as financial expertise.
Norfund’s largest investment sector is renewable energy, which represents about half of its portfolio. The remaining portfolio is divided in agriculture, financial institutions, and private equity funds for SMEs. In the last few years, Norfund has expanded its investment in three distinctive areas that have required developing innovative approaches and strategic alliances.
First, Norfund has scaled up investment activity in fragile states. In 2013, Norfund issued a
US$ 2 million loan to Proximity Design in Myanmar, a microfinance institution primarily lending to small farmers. Norfund is also involved in a major hydropower plant in Fula
Rapids, South Sudan. In the latter, Norfund works closely with the Norwegian Development
Agency (Norad) in order to ensure complementarity of funds and competences. Norfund has taken on the project developer role in addition to being an investor, while Norad has provided extensive grant funding for feasibility studies and technical assistance on the Government side. Working in fragile states, Norfund has mobilized or committed significant resources for business case development and technical assistance, both in partnership with Norad and through its own small Grant Facility. With the ability to balance risk across its portfolio,
Norfund id also able to take high political risk alongside less risky investments in other countries and sectors.
Second, Norfund is increasingly leveraging private capital for co-investments. In 2012,
Norfund signed an agreement with the Norwegian pension fund KLP whereby KLP committed to invest US$ 80 million over five years in renewable energy and finance in developing and emerging economies. These investments, while typically not in the Least
Developed Countries (LDC) and fragile states, they are limited to developing countries in the
Norfund portfolio. Hence, they expand the geographical presence of KLP significantly. In
2013 KLP joined Norfund in investing in a solar park in South Africa. Through this arrangement, KLP provides much needed long-term capital while piggybacking on the technical expertise, local knowledge, and sustainability standards of Norfund.
Third, Norfund has pioneered joint ventures with industry in the energy sector. Norfund has pioneered innovative approaches to its investments in renewable energy across a number of projects. SN Power was established in 2002 as a joint venture between Norfund and the
leading Norwegian power company Statkraft. SN Power is Norfund’s largest investment and invests equity in hydropower in emerging markets. In 2009, Agua Imara was established as a subsidiary of SN Power, co-owned by Norfund, Statkraft, and two regional power companies.
Agua Imara’s mission has been to focus on hydropower development in Africa and Central
America. In May 2013, it was announced that the two companies would be restructured.
Norfund would take a higher stake in the Africa and Central America portfolio and Statkraft would gradually take over the less risky portfolio in Asia. The restructuring reflects Norfund’s overall strategy to be a first mover and phase out its investment as other and more commercial investors take a stronger interest. In addition to loan and equity, Norfund has a small grant facility that can be used to pioneer new approaches and business models, inter alia in inclusive finance.
ANNEX 4: A COMPARISON BETWEEN THE CONCESSIONARY
CREDITS AND THE CURRENT LOANS AND GUARANTEES
Countries of investments
Tying status
Type of financing
Lender
Loan/guarantee connection
Currency of loan
Sector/theme
Borrowers/guarantees
Risk assessment
Administration of guarantee reserve
Stakeholders in Sweden
Concessionary credits
Seldom countries where Sweden had country strategies (strict creditworthiness criteria)
Tied
Contract financing
Swedish bank (with Sida guarantee)
Guarantee always linked to CC
SEK or US$
Infrastructure, mainly energy and telecoms
Governments, public utility companies
Sida on the advice of Swedish
Exports Guarantee Board (EKN)
EKN
(Loans and) freestanding guarantees since 2009
Country strategy countries, multi-country banks and funds
Untied
Project financing
Any lender, Swedish, international, national
Guarantee provided independent of provision of loans
Any foreign or local currency
Any sector/theme (Health, agriculture, water, SMEs most common up till now
Commercial banks, non-bank financial institutions, trust funds
Sida on the advice of EKN, Swedish National Debt
Board or outside expertise
EKN
No Swedish stakeholder needed
Grant elements
ABB, Ericsson, other equipment suppliers and contractors
35 – 80 % of a combined CCs
Administration costs
Co-financing
Collaboration with
Swedish embassies
Strategic partnerships
Collaboration with DFIs
Guarantee premium subsidy
Additionality
Catalytic effect
Scaling up and replicability
Not charged by Sida
Normally not. Occasionally parallel financing with IFIs
Limited. Not needed as there were separate budget allocation for CC
ADB
Non-existent
Infrequent
Limited
None
None
Up to 80 % in the total financing. A grant may be provided up front while the credits be given later
Chargeable by Sida
First loss guarantees, partial risk guarantees, advance market mechanisms, reinsurance, frontloaded guarantees, disaster guarantees co-financed with IFIs, DFI, commercial investors, patient investors, charitable funds etc in any form
Increasing specially since 2014 as there is no separate budget allocation but funds have to be taken from country allocations
With USAID, ADB, Gates Foundation
Frequent
Normally
Often substantial
Substantial
Substantial
ANNEX 5: DEVELOPMENT OF LOCAL CAPITAL MARKETS
Sida has a long history supporting local capital market development. Sida organized and supported the first corporate bond issue in Uganda in 1999 in collaboration with the borrower,
MTN Uganda, and its principal owners, MTN (South Africa) and Telia Overseas. It was a pioneering transaction as there was no long-term debt market. Even the market for government bonds was highly limited and illiquid. Sida provided a partial credit guaranteed of the issue of Uganda shilling denominated floating rate notes, which were mainly taken up by local institutional investors such as National Social Security Fund. Sida´s guarantee for 80
MSEK covered 90 % of the nominal value of the notes but no interest. Partly linked to the bond issue was Sida support (jointly with GIZ) to the budding capital market´s regulatory framework and to its main institutions, the Capital Market Authority and the Uganda
Securities Exchange.
The focus on local capital markets has continued. Sida has worked with IFC to develop wellfunctioning securities markets in Africa within the Efficient Securities Markets Institutional
Development (ESMID) program. The initial focus was on East Africa (Kenya, Rwanda,
Tanzania and Uganda) and Nigeria. The program has recently spread to other regions including regions outside Africa. The program provides legal and regulatory assistance, development of secondary markets and improved market infrastructure, capacity building and financial and advisory support for bond issuance on local capital markets.
As noted in the main text, a Sida initiative, GuarantCo, has its local currency guarantee mandate. GuarantCo has now participated in several partial risk guarantee transactions that have included local bond issues, including a shariah bond offering. In some cases, they have partnered with DFIs such as FMO, IFC and DEG (the German DFI). A few GuarantCo capital markets transactions in Sub-Saharan Africa are worth mentioning: ALAF, a steel plant in
Tanzania; Spencon, an East African construction company; and Kaluworks, an aluminium roofing manufacturer in Kenya. Sida does not have any direct involvement in any of these transactions. It is noteworthy that GuarantCo has been successful in acting on its mandate namely to act as a developer in capital markets, as Sida had originally envisioned. Looking forward , there are opportunities for Sida to use its guarantee instrument to co-guarantee with
GuarantCo, rather than participate in GuarantCo as an investor only.
It is surprising that Sida’s interest in playing an active role in the development of instruments suitable for long-term bond markets and in actual transactions has been dormant. The flexible guarantee facility seems to be an ideal tool for this purpose.
