Discussion Paper - undp.org

1 Innovative Financing for Development: A New Model for Development Finance? January 2012 Discussion PaperInnovative Financing for Development: A New Model for Development Finance?January 2012 Copyright January 2012 United Nations Development Programme Bureau for Development Policy One United Nations Plaza New York, NY 10017, USAE-mail: site: This Discussion Paper was written by Gail Hurley, Bureau for Development Policy, UNDP. Research assistance was provided by Sofia Palli, also of the Bureau for Development Policy, UNDP.

2 The author would like to thank the following people for their guidance and comments in the drafting of this Paper : Paul Ladd (UNDP), Anne-Marie Sloth Carlsen (UNDP), Yanchun Zhang (UNDP) and Pedro Martins (Overseas Development Institute).Contact InformationGail Hurley, Poverty Group, Bureau for Development Policy, UNDP: views expressed in this publication are those of the authors and do not necessarily represent those of the institutions to which they are affiliated or the United Nations or their Member States, including of Acronyms and Abbreviations 2 Abstract 31.

3 Introduction 52. Innovative financing for development: what s it all about? 73. Major innovative financing for development initiatives Taxes, dues or other obligatory charges on globalized activities Frontloading and debt-based instruments State guarantees, public-private incentives, insurance and other market-based mechanisms 144. Innovative financing for development: initiatives under Discussion Financial transactions taxes Carbon taxes Solidarity Tobacco Contribution IMF s Special Drawing Rights 205. Innovative financing for development and the experience so far: key issues and considerations for the future Have innovative financing for development initiatives generated additional resources for development?

4 Have innovative sources of development finance delivered concrete development results? Which countries have benefited from innovative financing for development and why? Have innovative financing for development initiatives delivered stable and predictable resources for 27 international development and climate/environment? Have innovative financing initiatives strengthened country ownership of the development process? Have innovative financing for development initiatives supported capacity development in beneficiary 31 countries? Have innovative financing for development initiatives accentuated issues related to fragmentation and 33 coordination in international aid delivery?

5 Is innovative financing for development sustainable over the longer-term? Can innovative financing for development be scaled up and/or initiatives replicated in other 36 development areas or regions?6. Looking forward: the place of innovative finance in a changing development financing landscape 38 Notes 41 Annex: A Snapshot of the Pros and Cons of Different Approaches 44 Glossary: Major innovative financing for development initiatives 54 References 57 List of Acronyms and AbbreviationsACTs Artemisinin-based Combination TherapiesAFD Agence Fran aise de D veloppement (French Development Agency)

6 AMC Advance Market Commitments AMFm Affordable Medicines Facility for Malaria BTC Belgian Technical Cooperation CCRIF Caribbean Catastrophe Risk Insurance Facility CDM Clean Development Mechanism CERs Certified Emissions Reductions CTT Currency Transactions Tax DAC Development Assistance CommitteeEC European CommissionEU European Union EU ETS European Union Emissions Trading Scheme FTT Financial Transactions Tax GAVI Global Alliance for Vaccines and ImmunisationGNI Gross National Income HIPCs Heavily Indebted Poor Countries HSS Health System Strengthening IBRD International Bank for Reconstruction and DevelopmentICT Information and Communications Technology IDA International Development Association IFFIm International Finance Facility for Immunisation IMF International Monetary Fund IRED Initiative R gionale pour l Energie Durable (Regional Initiative for Sustainable Energy)

7 LDCs Least Developed CountriesMDBs Multilateral Development Banks MDGs Millennium Development Goals NGOs Non-Governmental Organizations OBA Output-based AidODA Official Development Assistance OECD Organisation for Economic Cooperation and DevelopmentPES Payments for Ecosystem Services PIUs Parallel Project Implementation Units PPP Public Private PartnershipsSDRs Special Drawing Rights StAR Stolen Asset Recovery InitiativeTB TuberculosisUEMOA West African Economic and Monetary UnionUN United NationsUNDP United Nations Development ProgrammeUNESCO United Nations Educational, Scientific and Cultural Organization UNEP United Nations Environment ProgrammeUNICEF United Nations Children s FundUNODC United Nations Office on Drugs and Crime UN-REDD United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation WB World Bank WHO World Health Organization WWF World Wide Fund for Nature WWF3 Innovative Financing For Development: A New Model For Development Finance?

8 AbstractAbstractThis Discussion Paper explores recent experiences with innovative sources of development finance in order to capture lessons learned for the more effective implementation of both current and future initiatives. We first look at what is understood by the term innovative financing for development since the term encompasses a heterogeneous mix of innovations both in fund-raising and in spending on the ground. We then summarise some of the major schemes implemented so far and outline how they work. The Paper then reviews a number of proposals currently on the table for future innovative development finance schemes and examines the political dynamics associated with each.

9 We then assess the record of innovative sources of development finance against nine key questions which serve as useful indicators of the added value and possible draw-backs of each instrument. These include questions such as: the extent to which initiatives have created additional financial flows for development, have supported country ownership of the development process, delivered predictable finance and supported concrete development results. Finally we explore the place of innovative financing for development in a changing development financing landscape.

10 Specifically, we look at whether we are likely to see increased dependence on such mechanisms in the future and consider the possible benefits and risks associated with such a shift. The Paper aims to provide some insights into the pros and cons of different approaches and, as such, make a useful contribution to international policy discussions over the design and implementation modalities of both current and future innovative sources of development finance. 5 Innovative Financing For Development: A New Model For Development Finance?Introduction1.