Innovative Finance is Creating New Foreign Aid Successes

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SEATTLE—In a time when national budgets are shrinking and the international NGO (INGO) sector is losing its vitality, innovative finance has emerged as a new way of addressing the complex challenges of the developing world. In the process, it has led to a number of success stories.

As the name implies, innovative finance is an umbrella term for unconventional methods of raising aid money. Traditionally, taxpayer dollars and charity organizations have raised the majority of foreign aid.

However, innovative finance involves private companies partnering with governments and NGOs. They then use financial tools to unlock additional sources of funding.

Innovative finance is by no means a replacement for government foreign aid. In a 2014 interview with EurActiv France, Philippe Douste-Blazy, Special Advisor to the United Nations Secretary-General on Innovative Finance for Development, emphasized that innovative projects intend to complement existing public measures.

It appears, however, that innovative finance is more necessary than ever. An OECD report published in 2013 found that many EU member states had scaled back their foreign aid contributions.

Only the United Kingdom maintained its level of development assistance, contributing 0.7 percent of its Gross National Income in 2013. Not only can innovative finance be used to make up for lost government money, but it has also proven to be a much more effective delivery mechanism for aid.

In January 2015, a drought struck the Sahel region in Northern Africa. The area is a semi-arid zone south of the Sahara that has suffered numerous dry spells.

Soon after, three countries in the region—Mauritania, Niger and Senegal—received $26 million in disaster relief. This money came not from donations, but the insurance policies that they had purchased from the African Risk Capacity (ARC) Insurance Company.

The ARC Insurance Company began in 2014 with funding from the German government-owned KfW Development Bank and the U.K. Department for International Development. Member countries of the African Union jointly own the company.

The amount of aid was modest, but ARC had processed insurance claims before the U.N. even started calling for donations.

This demonstrates the fact that innovative finance has become an efficient mechanism for channeling resources to countries in need of assistance, where governmental and non-governmental groups may fall short.

Because Mauritania, Niger and Senegal did not have to wait for aid donations, they were able to distribute food, fund work programs for displaced farmers and prevent widespread famine. Innovative finance seems uniquely suited to provide emergency relief in the wake of natural disasters.

There are other examples of foreign aid successes through innovative finance. The British government, Goldman Sachs and other investment banks founded the International Finance Facility for Immunisation (IFFIm) in 2006. Since then, IFFIm has raised a total of $5.25 billion selling “vaccine bonds” to institutional investors.

Money from these sales allowed nonprofit organizations like Gavi, the Vaccine Alliance, to expand their vaccination programs. In 2011, the health consultancy HLSP estimated that IFFIm had saved 2.75 million lives.

New technological advances and ways of thinking have opened up a range of possibilities, and innovative finance has a proven record of foreign aid successes. Not only were countries like the U.K. able to fulfill their commitment to the U.N. Millennium Development Goals through private capital, but corporations can quickly and efficiently raise aid.

Philip Katz

Photo: Flickr

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