Reaching the last mile: The role of innovative finance in meeting the SDGs

By Judith Karl, Executive Secretary of UNCDF, and Samuel Choritz, Policy Adviser at UNCDF

financesdgsTo meet the SDGs with their emphasis on leaving no one behind, we need solutions that tackle persistent exclusions and inequalities in the local economies and communities where the poor live and work. Targeting the last mile means adapting solutions to the households, localities and small enterprises that are underserved, where development needs are greatest and where resources are scarcest.

Addressing market failures by making finance work for the poor is a critical catalyser to this end. Official Development Assistance (ODA) can be the largest source of external finance in least-developed countries, where private investment often favours commodity and real estate sectors. Disparities in incomes and living standards show that location matters more for living standards in developing countries than it does in developed ones [1]. “Last mile finance” models can use public resources — such as ODA — to de-risk and crowd-in public and private finance, especially from domestic sources, to create virtuous dynamics of inclusion, local growth, resilience, and productive investment. Continue reading

How China’s Rebalancing Affects Africa’s Development Finance … and More

By Helmut Reisen of Shifting Wealth Consulting and former Head of Research at the OECD Development Centre

 

Africa-globe2015 has been a challenging year for Africa. Average growth of African economies weakened in 2015 to 3.6%, down from an average annual 5% enjoyed since 2000. Total financial flows have decreased 12.8% to USD 188.8 billion, including UNCTAD estimates for foreign direct investment. Africa´s tax-GDP ratio tumbled to 17.9%, down from 18.7% in 2014.

Three core factors have underpinned Africa’s good economic performance since the turn of the century: high commodity prices, high external financial flows, and improved policies and institutions. Now, China´s decline in investment and rebalanced growth is depressing commodity prices and producing headwinds for Africa. Such macroeconomic headwinds for net commodity exporters also imply that Africa’s second pillar of past performance — external financial inflows — have suffered as well.

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Setting the Record Straight on ODA

By Doug Frantz, Deputy Secretary-General, OECD 

Doug FrantzThere will never be enough development aid to solve all the problems in the poorest countries. If we are to lift the last 800 million people out of extreme poverty we will need to find new ways to mobilize resources beyond the traditional assistance from wealthy governments in the form of loans, grants and other concessions.

Government assistance remains vital. The billions of dollars donor countries pour into developing countries every year are critical both in terms of actual aid and as a catalyst for mobilizing private sector funds and underpinning the efforts of developing country governments and civil society. Yet there is a consensus that the role of development aid must adapt to changes in the geography of poverty and to the new lens of the Sustainable Development Goals.

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Africa’s Blue Economy: An opportunity not to be missed

By Dr. Carlos Lopes, UN Under Secretary General & Executive Secretary of the UN Economic Commission for Africa

Blue-economyThe world’s oceans, seas and rivers are a major source of wealth, creating trillions of dollars’ worth in goods and services as well as employing billions of people. Three out of four jobs that make up the entire global workforce are water-dependent. It is forecasted that the annual economic value of maritime-related activities will reach 2.5 trillion euros per year by 2020, while the International Energy Agency estimates that renewable energy from the ocean has a power potential sufficient to provide up to 400% of current global energy demand. Yet Africa’s blue potential remains untapped. Continue reading

Unlocking Private Finance in Frontier Markets

By Dr. Nancy Lee, Deputy Chief Executive Officer, Millennium Challenge Corporation

The development landscape has changed fundamentally. Private actors and private finance increasingly drive development, and annual private financial flows to developing countries now amount to more than five times official aid flows. Potential sources of development funding — institutional investors, impact investors, foundations, diaspora communities, sovereign wealth funds — are not lacking.

The challenge is to harness more of these flows for poorer countries and for investments with more development impact — which is central to the conversation at this month’s World Economic Forum on Africa in Rwanda. Even motivated investors face two critical impediments: (1) weak and sometimes toxic policies and investment climates and (2) underinvestment in the supply of bankable projects. Continue reading

How will the world raise the $4 trillion needed to pay for the SDGs and can philanthropy help?

By Sam Parker, Director, Shell Foundation – an independent charity

If the global community doesn’t find a way of increasing available finance by a factor of ten, reaching the Sustainable Development Goals (SDGs) remains a pipedream. Philanthropy is well placed to make a critical contribution by helping to trigger the massive increase in private capital. This is more critical than ever, now that the world has made such a fanfare about achieving the SDGs by 2030.

Meeting the SDGs will cost $3-$4 trillion a year of public and private money over the next 15 years. That is roughly 15% of annual global savings, or 4% of world GDP. Western governments promise to provide 0.7% of GDP in aid, and in fact deliver a third of that. Current annual SDG-related investment is around $1.4 trillion, implying a shortfall of $1.6-$2.6 trillion. In power alone, annual investment is around $260 billion, compared to the $630-$960 billion needed. Discussing deployment of funds that do not exist is fantasy.

It is now recognised that the shortfall must come largely from the private sector. In 2015, I heard senior UN officials, presidents and leaders of monetary financial institutions all concede that government funds are clearly insufficient, and that private capital must be mobilised if we are to stand a chance of reaching the goals. This is a shift in thinking. At the Millennium Development Goals planning meetings in 2000, there was little mention of the private sector and virtually none of philanthropy.

For new enterprises, we are seeing the first signs of material scale. Shell Foundation – an independent charity – has several partners, for example, who are now exceeding $50 million in annual revenues. However, for start-up enterprises to make a difference to the SDGs, we need to learn how to facilitate the growth of multiple enterprises simultaneously, whilst catalysing demand growth. In other words, we need to learn the art of market building. No plane will take off without a clear runway; no business will grow without a supportive market environment. Few demonstrated approaches to market building exist, and this remains a key challenge for philanthropy today.

So how should the finance gap be filled? Whilst the system has a lot of money, it is generally not the right sort of finance for stimulating the private sector.

For start-up social enterprises, there is an acute lack of early stage patient capital. According to the 2014 Global Impact Investment Network survey, of the $10 billion of impact investment, a mere 9% was seed stage. The CEOs we support spend two-thirds of their time on fundraising, rather than on other aspects of their business, like marketing, staff development, systems, finance controls and governance. Building start-ups needs plenty of early-stage grant funding. It is curious why social enterprises are expected to become profitable so quickly without the grant-support that most new commercial businesses enjoy.

While building new enterprises will ensure the pace of innovation, larger companies have the ability to take proven models to scale quickly and therefore have an equally critical role to play. For large multi-national companies (MNCs), it is often difficult to secure support from public institutions that are nervous about being perceived as benefitting private interests. I believe the untapped opportunity is huge to better leverage the power of MNCs through public-private joint ventures to accelerate progress towards the SDGs.

Philanthropy has a key role to play in building the new generation of financial products that are needed. We have seen promising results already from our portfolio. An innovative tiered capital structure has allowed small – and medium – enterprises (SME) financier Grofin, a Shell Foundation partner, to include different funders with different risk return appetites in a single fund for African SMEs. We have used a range of grants, convertible debt, loans, first-loss guarantees and equity at different stages of growth with companies like d.light, M-KOPA, Intellegrow and Envirofit.

Increasing the availability of all categories of finance is needed. Financial institutions with a mandate to contribute towards the SDGs need to offer the full range – not just the lower risk end. We won’t reach the SDGs if big money only invests in de-risked opportunities. How many planes would take off if passengers were only willing to pay for the latter stages of the flight?

More early-stage grants for start-ups, more grants for building supportive market environments, more mezzanine debt for mid–sized companies with limited track records, consumer finance targeting low income customers, more use of public funds in joint ventures with large corporations, tax incentives for critical technology and components, and government guarantees to local banks offering commercial credit to local entrepreneurs are needed. This is the transformation that is needed.


 

This article should not be reported as representing the official views of the OECD, the OECD Development Centre or of their member countries. The opinions expressed and arguments employed are those of the author.

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How the private sector can advance development

By Lorenzo Pavone, OECD Development Centre EMnet Co-ordinator; Kate Eklin, Policy Analyst; Myriam Grégoire-Zawilski, Programme Assistant; Josep Casas, Trainee

The Millennium Development Goals (MDGs) launched in 2000 centred on addressing basic human needs throughout the developing world. The recently adopted Sustainable Development Goals (SDGs) for the post-2015 era focus on economic growth, social inclusion and environmental protection as interconnected dimensions of broader global development. Unlike the MDGs, achieving this new set of ambitious goals calls for bolder action from diverse actors across society, whose collective efforts outweigh what they could deliver individually. And the private sector is not least among these actors. Why? Business-led initiatives, such as research and development partnerships, knowledge-sharing platforms, technology and skills transfer, and infrastructure investment have the potential to kick-start development, enable productivity gains, generate better quality jobs, strengthen skills and promote technological advances. Continue reading