Presented by Aniket Bhushan, Principal Investigator at the Canadian International Development Platform (CIDP). For more information, visit our website: www.cidpnsi.ca

1. Beyond Aid and the Future
of Development Finance
Aniket Bhushan
Adj. Research Prof. NPSIA/Carleton
Canadian International Development Platform
www.cidpnsi.ca

2. Outline
• Part 1
• Setup: theory and quick overview of data
• Part 2
• Development finance and innovative finance terrain
• Illustrative mechanisms/models in further detail
• Part 3
• Interactive exercise

3. Theory
• Aid, when conceived, was itself a financial
innovation – grounded in equal parts politics,
charity, sophisticated economic theory (in its day),
turned into policy innovation
• Two gap model (Harrod-Domar, Rostow, Chenery):
development/growth ‘take-off’ is limited by
investment. Investment is limited by savings.
Growth is a joint function of savings and ICOR (the
units of capital required to produce a unit of
output), i.e. s = k*g or g =s/k (adapted to second
gap – forex)

4. Theory
• Assumptions
• All savings drive investment
• All investment drives growth
• There are no frictions, there are no transaction costs
• All aid, essentially, investment

5. Theory
• Back-envelope calculation (Rosenstien-Rodan) showed
in 1960s capital needs would be around $10bn which
happened to be 1% of rich country GNI
• Capital flows were 0.6 to 0.8% of rich GNI – about 2/3
tended to be aid
• Mix of target aversion and ambition arrived at relatively
random compromise of 0.7, aimed mainly at US (which
would never commit)
• Direction reverse – staring point rich income, not poor
need/cost
• No real logic as to why static share of rich income
determines financing in unrelated disconnected context

6. Theory
• Intuitively appealing but flawed
• Present day financial flow conditions gives an aid
goal of around 0.01% of advanced economies GDP
towards aid in the poorest countries and implies
negative aid flows to the developing world as a
whole
• Why?

7. Data
• What does aid target/fund/buy?
• Aggregate DAC level / Canada
• How does it compare?
• Investment, remittances, OOF, etc.
• Aggregate level / Canada

10. What does aid target/fund/buy?
• Has changed over time
• From economic (hard) infrastructure and
productive sectors – quarter or less (Canada lower)
• To mostly social infra – health, education,
governance, other social – more than half

11. The spectrum
Basic survivalist Thriving society
Resilience
Emergency
response
Contain fallout
Equitable growth
Long term economic development
Socioeconomic transformation
Logic of
“intervention”
Logic of “investment”

12. What does aid target/fund/buy?
• Less and less investment
• Stretched capacity, compounding needs testing
serial intervention

13. Data
• What about the pattern of flows, how does aid compare?
• Several possible frameworks (Monterrey, FfD, Kharas et al.)
• Simple:
• Concessional vs. non-concessional (market) finance;
• Domestic vs. external/non-domestic
• Elaborate:
• Private flows – FDI, portfolio investment, philanthropic;
• Other official flows (e.g. export credits);
• Remittances; and more

22. Canada’s exposure to emerging
markets and developing countries
• Limited compared to other developed
economies
• Trade with SSA and SA, while growing,
< 1% of Canada’s trade
• Trade with LICs < 0.5%
• However, value of imports into Canada
from LDCs and LICs is 2x the amount of
aid from Canada to the same countries
• Total (stock) Canadian FDI in all
developing countries doubled (2001-
11), but, only 2% of total; poorest <
0.2%
• Remittances to all aid recipient
developing 5x aid; but, in the poorest
aid = approx. 5x remit from Canada

23. Inflection point – pick a camp
• Aid is essential for
developing countries,
for their development
• Being a donor is
essential for us, for our
relationship with
developing countries
and relationship with
other donors and
likeminded actors

24. Innovative finance landscape
• Public (taxpayer) money will not be enough
• Limited tools, models of allocation leave gaps
• Not just finance, but innovation in modalities
• Innovation to address incentive problems, balancing
ownership and capacity, pool capital and risk, and other
known challenges
• Well known, well trodden
• Market access (preferential agreements – LDCT, CMAI; GPT; CCCT;
FTAs, FPIAs)
• A4T
• Conditional (and unconditional) cash transfer
• Remittance prices (e.g. 5x5)
• Address frictional/transactional costs and inefficiencies – Blended
finance

25. Innovative finance landscape
• models that aim to alter the incentive structure of aid
allocation to leverage non-traditional capital, link aid more
directly to the achievement of quantifiable results, motivate
behavioral change and or to catalyze innovation
• MCC
• AMC, push pull mechanisms (Gavi, but also others)
• IFFIm (vaccine, Gavi)
• Cash on Delivery aid, other results-based / output-based
• Consumer initiatives (RED)
• Levy(s) (airline)
• Challenge funds

26. Pneumococcal AMC: mechanism

27. IFFIm: mechanism
Vaccine bonds

28. Innovative finance landscape:
prospects
• Distinction between development finance and finance blurs
further
• Aid (re-emerges) as investment
• Development impact bonds (first issuance 2014)
• Diaspora bond (Israel since 1951; India opportunistic)
• Remittance flow securitization (Japan-BdB)
• Aid and other future flow securitization (resource
receivables, ODA receivables, to some extent already e.g.
IFFIm, minus securitization)
• Innovation in capital structure (new forms of mezzanine
financing, risk insurance)
• Leverage to increase ODA (reflows) (AfD integration into
French CDC)

29. DIB/SIB: mechanism
• 5(+1) key players and their roles:
• Intermediary: raises working capital/investment capital from investors
(HNI, foundations, funds etc.)
• Service provider(s): implement innovative solutions
• Population/target:
• Independent evaluator: independently verifies and validates
• Outcome funder (gov., or third-party): if solution achieves predefined
social outcome, pays investors, through the intermediary (share of
savings), based on degree of outcome achieved
• Investors: provide capital, may also be charged fee by intermediary
• Returns ~= degree of outcome
• Risk transferred away from gov. to investor (to varying degrees)

30. DIB/SIB: mechanism

31. DIB/SIB: mechanism
• Meaningful, measureable
(in some cases
monetizable) outcomes
• Time horizon that works
across stakeholders
• Evidence and attribution
• Independence of
evaluator
• Controls mitigate
perverse incentives
• Legal and political factors
• Evidence anchored from
the start
• Transfer of risk
• Aligned incentives
(learning)
• Scale and link multi
service providers

32. DIB/SIB: mechanism
• First SIB – 2010 (UK), criminal justice (Peterborough prison),
reduction in reoffending among short term (12month) young
offenders, small GBP 5 million
• As of March 1, 2015 – 38 active SIBs, majority in UK, then US, Aus;
• Majority small (under 5mn); majority shorter term (20 to
60months, some in UK, US, Aus, 80 to 120 months);
• Most upfront capital commitment senior investment, followed by
sub investment, recoverable grants, non-recoverable;
• Social welfare, employment, criminal justice, education
• Wide variation in target rates of return from 2% to 7.5% for senior
investors, typically lower for sub (but also wide ranging in some
cases much higher)
• Successes overall, but yes, some losses (e.g. NYC criminal justice
SIB, but born by Goldman and Bloomberg Philanthropies)

33. DIB/SIB: mechanism
• First SIB in Canada – May 2014, Saskatoon; supported
living for single mothers in unhealthy family
environments; 5yr; $1.4mn upfront capital; 5% return
• First DIB – 2014, India – UBS Optimus Foundation,
Children’s Investment Fund Foundation, Educate Girls
and Instiglio announced Development Impact Bond
(DIB) pilot to improve educational outcomes in
Rajasthan, India.
• DIBs under development include – Uganda (sleep
sickness, education, family planning), South Africa
(criminal justice, SME business development, TB
prevention), Mozambique (malaria), Morocco (youth
employment), Ghana (SME development and workforce
training)

34. Innovative finance: challenge
• Not true to development – distracts or worse detracts
from priority issues in core countries/regions areas of
concern
• Misdiagnosis of problem – to what extent is low
investment a ‘risk perception’ problem, info asymmetry
problem, frictional/transactional cost problem
• Wrong solution – at what point does subsidizing risk
create bigger distortion, when does incentivising
innovation or lowering entry barriers become
offloading risk or burden of proof (challenge funds)

35. Catalyst for change
• Not financial innovation but what financial innovation can
unlock
• Change orientation and mentality (top down aid planner
mentality to bottom up explore/innovate)
• New partnerships, collaborations, stakeholders; including
but not limited to crowding in private capital
• Metric driven focus on outcomes; not just ‘data-driven’ but
data being used in near real time for actual decision making
and adaptation by those generating it (miles from donor
reporting and roll up!)
• Truly independent verification and validation, and
innovation in the same
• Experimentation and ultimately, hopefully, innovation, in
service delivery and final outcomes

36. Interactive exercise
Design a policy idea (innovation or intervention) backed by analysis, focusing on the core mechanism,
stakeholders, market(ing), risks, payoff expectations – and present to challenge panel
1. Design investment framework for DFI keeping double bottom line in mind (development outcome
and ROI), suggest what the first investment should be, where and why
2. Suggest aid allocation formula that takes into account beyond aid dynamics, apply to current
priorities and describe if and what change, pick a country/region, design a strategy that would help
fill assessed gap
3. Design an innovative financing strategy for one of the SDG/GG, which is costed beyond levels
achievable via current aid/concessional financing levels, incorporate development finance
innovation, describe why that innovation and why it may work
4. Present a rationale for the first Canadian development impact bond, describe its mechanism, why
and how it could work, embedded risks and risk mitigation, how it would be marketed, and what
expectations stakeholders (all stakeholders – investors, issuers, investment beneficiaries) should
have
5. Design a financial product that will help diversify Canada’s trade and investment footprint into
potentially higher return frontier/LD/fragile markets but where structural constraints limit exposure