Global Innovation Finance Transformation

The UN estimates developing countries will need 2.5 Trillion USD a year to achieve the Sustainable Development Goals by 2030 and that the vast majority of these funds must come from non-government sources. There is an urgency for new financing sources that complement the ongoing financial strains.

Of recent times, we are finding the emer­gence of a number of new financing models, growing both in terms of their market size, their operations and the way they serve those in developing countries, as a new alternative. These innovative finance instru­ments are projected to unlock private capital and help further leverage public funding to mobilize various new sources of investment for public policy, social ser­vices and development goals, while at the same time realigning interests of various partners and creating new investment opportunities.

The Red Cross and Red Crescent is pushing the envelope in innovation and financing, and has already gained considerable credibility through global recognition from key influencers in this space for efforts thus far. Last year the IFRC established together with British, Denmark and Kenya National Societies a Global Innovative Finance Team (GIFT) with the aim of collaboratively structuring new financial mechanisms and adapting financial technologies to build capacity across National Societies by adopting a learning by doing approach and leverage new sources of financing to meet humanitarian and development needs.

Why Innovative Finance

Innovative Finance is not simply fundraising but illustrates a value chain model that has emphasis on developing capacity, exploring multiple business models and influencing a whole new way of transformative working and partnerships across the Federation and National Societies.

In our early exploration of potential, we have already begun interacting with various partners and seen the for­mulation of different models that together can make up a portfolio of innovative finance instruments that IFRC can deploy to not just unlock alternate capital for affected communities and National Societies but can also help accelerate our learning curve in a space that clearly has a lot of potential.

GIFT sits within the IFRC’s Global Innovation Team, under the Leadership of the Global Innovation Lead and the Under-Secretary General for Partnerships. The team will report to IFRC’s Innovation Lead, to deliver its mission, and is accountable for its management and outputs.

While the day to day operations of the unit are managed by the IFRC Innovation team, the overall initiative is guided by a small steering group that includes Senior representatives from contributing Partner Na­tional Societies, National Societies from priority Developing Countries and Senior Secretariat members including the USG Partnerships.

Library

GIFT 2019 Report

This is the second update of the Global Innovative Finance Team (GIFT) since its activities launched in mid 2018.

One wash sukuk concept note

Islamic Finance together with the Humanitarian and Development Sector provides a shared foundation for social and economic justice that can contribute to shared prosperity through the principles of inclusive participation and risk sharing, and achievement of the Sustainable Development Goals (SDGs).

Beyond Charity - the transformative power of zakat in humanitarian crises

Case study: How zakat support from Malaysia helped communities in Kenya recover from drought.

Innovative finance stories

Red Cross making volcano cat bond progress

This story was originally published by Luke Gallin on www.artemis.bm The Danish Red Cross and International Federation of Red Cross and Crescent Societies are making progress with their first ever catastrophe bond transaction, revealing a tiered trigger structure...

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Red Cross aims to sponsor first pure volcano cat bond

Read the original story by ARTEMIS International humanitarian movement the Red Cross is looking to the capital markets and the potential issuance of a parametric catastrophe bond to protect against volcanic risks, according to Adam Bornstein. Adam...

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Catalyzing Sustainable Financing with Duty and Dignity

The UN estimates developing countries will need 2.5 Trillion USD a year to achieve the Sustainable Development Goals by 2030 and that the vast majority of these funds must come from non-government sources. There is an urgency for new financing sources that complement...

read more

Innovative finance examples

CCRIF – Disaster Risk Insurance

Organization:

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) aims to limit the adverse impact of catastrophes such as hurricanes, earthquakes and excess rainfall on member governments and their populations. Formed in 2007, it was the first multi-country risk pool in the world.

How it works:

CCRIF is an insurance policy subscribed by member countries (primarily in the Caribbean), which allows for rapid disbursement of funds in the event of a catastrophe. Payout of funds to affected members is determined by a trigger event occurring (parametric insurance). Financial liquidity and availability of funds when disasters occur minimizes the negative impact of these events on governments and their populations by allowing for swift deployment of resources towards disaster response efforts. The insurance payout mechanism mitigates cash flow issues often experienced especially by small developing countries when responding to disasters.

Since its inception in 2007, the CCRIF facility has made 38 payouts to 13 member governments on their tropical cyclone, earthquake and excess rainfall policies totaling almost US$139 million. Also, CCRIF has made 7 payments totaling almost US$700,000 under member governments’ Aggregated Deductible Cover (ADC), which allows for minimum payments for events not meeting the minimum trigger threshold.

The World Bank led the development of the CCRIF and provided the technical expertise, while donor governments, the Caribbean Development Bank and member countries (through premium payments) provided initial funding. Member governments currently include 19 Caribbean countries and 2 Central American countries.

More information:

https://www.ccrif.org/content/about-us

https://www.ccrif.org/sites/default/files/CCRIF-Model-Development-Update-February2019.pdf

https://www.ccrif.org/sites/default/files/publications/Synopsis-How-Governments-have-used-CCRIF-Payouts-February2019.pdf

Pay for Success Financing / Social Impact Bonds

Pay for success financing or social impact bonds are innovative structures that direct capital from private investors towards positive social outcome projects. Apart from ICRC’s Humanitarian Impact Bond, other numerous examples of social impact bond or pay for success models illustrate the potential of innovative finance models that channel capital to a wide array of social and development initiatives, resulting in cost savings for governments and populations.

 

Pay for success or outcomes-based financing involves a public-private partnership model where the private sector advances the capital required for programs and initiatives aimed at a specific set of social objectives. The private sector investors reap returns from outcome buyers (typically public sector entities) that agree to pay for the project at a rate based on the level of success or predetermined desired outcomes achieved.

DC Water Environmental Impact Bond – Pay for Success Financing

Organizations:

The Environmental Impact Bond is a financing mechanism involving DC Water and Sewer Authority (DC Water) and Quantified Ventures. Initial financing is used towards a green infrastructure project that aims to reduce storm water runoff and combined sewage overflow in Washington, DC.

How it works:

Large infrastructure upgrade works were required to address a persistent problem in Washington, DC’s water systems. Due to a combined sewer system designed and built 150 years ago, the water and sewage systems are not able to meet capacity during heavy precipitation periods.

Quantified Ventures structured the bond transaction, and found investors in Goldman Sachs and Calvert Foundation to provide the upfront capital of US$25 million for the Rock Creek Sewershed green infrastructure project. DC Water acts as a service provider and outcome buyer. Investor returns are tied to the performance outcome of the infrastructure project.

The project aims to provide an alternative and more sustainable method to address urban storm water volume. Due to the riskier nature of an innovative green infrastructure project, investors carry the financial risk and would be compensated for successful outcomes. Additionally, the project provides other benefits such as economic development, sustainable job creation, and healthier communities.

More information:

http://www.quantifiedventures.com/dc-water

https://www.goldmansachs.com/media-relations/press-releases/current/dc-water-environmental-impact-bond-fact-sheet.pdf

https://www.dcwater.com/whats-going-on/news/dc-water-goldman-sachs-and-calvert-foundation-pioneer-environmental-impact-bond

Khazanah Sukuk Ihsan – Sustainable and Responsible Investment Sukuk for Education

Organization:

Khazanah Nasional Berhad is a strategic investment fund owned by the Malaysian Government, under the Ministry of Finance. Established in 1994, the firm undertakes investment activities that are aligned to strategic and financial interests of the nation and has a portfolio exposure in a variety of industries such as telecommunications, aviation, banking, technology, and education, among others.

How it works:

Khazanah issued an Islamic social impact bond (Sukuk Ihsan) in 2016 to finance education-related projects in Malaysia. Similar to social impact bonds or pay for success financing structures, the Sukuk Ihsan structure also incorporates additional conditions to comply with Islamic investing principles. A distinguishing feature compared to other social impact bonds is also the availability of the bond for smaller retail investors and the availability for pooling funds or crowd funding for bond subscriptions for retail investors.  

Funds are raised from investors for service providers to undertake education-related initiatives. Returns from the investment are determined by predetermined outcomes or rates of success of the projects. However, unlike other social impact bonds, the Sukuk Ihsan stipulates that principal amount to be repaid is reduced when certain projects hit targets (which works inversely to typical impact bonds where returns directly correlate to project success). Investors are also given the option to waive their rights to the principal and investment returns at any point of the investment period.

More information:

https://www.khazanah.com.my/About-Khazanah/Our-Case-Studies/Khazanah-360/Sukuk-Ihsan-Sustainable-and-Responsible-Investme

https://www.reuters.com/article/asia-bonds/khazanah-to-launch-malaysias-first-social-impact-bond-idUSL4N0XQ2A420150429

African Risk Capacity – Disaster Risk Insurance

Organization:

The African Risk Capacity (ARC) is an agency of the African Union that aims to support African governments to improve their preparation and response to disasters and extreme weather events, primarily droughts. 

How it works:

The ARC Insurance Company Limited (ARC Ltd) serves as a risk pooling and risk transfer entity that operates a parametric insurance facility. ARC receives premiums from participating countries, and allocates payout to countries affected by severe drought events. The payouts are triggered when rainfall deviation is sufficiently severe such that the estimated response costs crosses a pre-defined threshold. Due to the fact that weather risks are naturally diversified across the African continent, participating member states are able to benefit from the insurance system that ensures the availability of capital when their country is affected. 

The ARC currently offers a maximum coverage of US$30 million per country per season for drought events that occur with a frequency of 1 in 5 years or less. ARC calculates country premiums and allocated payouts in consultation with countries. In addition to financing, participating countries are required to form operation plans that are best suited for the disbursements. 

The structure is intended as part of an early response mechanism, and an analysis by Boston Consulting Group states that the benefits of risk pooling and reduced response times can result in cost savings of approximately 4.4 times compared to traditional humanitarian emergency appeals funding.

More information:

http://www.africanriskcapacity.org/resources/

http://www.africanriskcapacity.org/about/how-arc-works/

Massachusetts Pathway to Economic Advancement – Pay for Success Financing

Organizations:

The Pay for Success project involves three main parties: Social Finance (investor), Jewish Vocational Service (JVS) (service provider) and The Commonwealth of Massachusetts (outcome buyer). 

How it works:

In the Greater Boston area, adult English-language learners face challenges in gaining employment. Effective programs designed for this population can help fill the skills gap in the Massachusetts economy and improve the community’s earning potential. Prior to the Pay for Success project, vocational training and related programs were in high demand and very underserved.

Social Finance plays a part in structuring the project and raising the initial capital from a pool of impact investors. JVS undertakes the project implementation (providing workforce development services to the local community), and the local government (Massachusetts Commonwealth) is the outcome buyer, agreeing to compensate investors at a rate determined by the actual success of the service providers. 

The Pay for Success model is effective in aligning incentives between different parties and channeling private capital to fund social impact projects. The structure shifts the risk away from The Commonwealth of Massachusetts and taxpayers, while allowing investors to potentially earn a financial return. The outcome buyers (Massachusetts) only make payments for realized results.

More information:

https://socialfinance.org/focus-areas/workforce/massachusetts-pathways-economic-advancement-project/

https://socialfinance.org/content/uploads/MAPathways_FactSheet.pdf

Islamic Finance Tools

Islamic finance is a growing sector that can be leveraged as a way to channel investment and funding for humanitarian and development activities. Apart from the zakat financing project undertaken by the IFRC, other organizations have recognized the potential of Islamic finance and developed various structures that meet their specific targets. Under the umbrella of Islamic finance, sukuk (Islamic bond) issuances have become an avenue for raising capital that is gaining increasing popularity and acceptance.

Indonesia Green Sukuk Issuance – Climate Change Mitigation and Adaptation Projects

How it works:

The Government of Indonesia issued the world’s first sovereign green sukuk in 2018. The funds raised from the issue will be utilized towards climate change initiatives and green investment projects. With the US$1.25 bn issuance, the Indonesian government is the first country to use Islamic financing to structure a sovereign bond targeted for adaptation and resilience efforts, in addition to biodiversity preservation.

This example illustrates the important and crucial role that governments can play in catalyzing private capital and Islamic finance towards climate change efforts. It provides a model for how the public and private sector can leverage Islamic finance to tackle a variety of humanitarian and development challenges.

More information:

https://www.sdgphilanthropy.org/Indonesia%27s-Green-Sukuk-2019-Report

http://www.id.undp.org/content/indonesia/en/home/presscenter/pressreleases/2018/4/indonesia-tackles-climate-change-through-the-issuance-of-green-s.html?cq_ck=1522745732024

https://www.undp.org/content/undp/en/home/blog/2018/Indonesias-green-sukuk.html

IRC Airbel Center – Displacement Insurance

Organization:

The International Rescue Committee’s innovation team, The Airbel Center, develops products to improve humanitarian response and is currently designing a displacement insurance mechanism. 

How it works:

The insurance product is aimed at facilitating a swifter disbursement of funds during displacement crises, which would enable for a more agile aid response. A pre-determined trigger event such as a large increase in refugees would signal the need for a payout to be directed to aid providers in affected countries. The insurance product is at early developing stages. 

Airbel is currently working with United Kingdom’s Department for International Development’s Center for Global Disaster Protection to gain a better picture of the market for risk-based financing products. 

While still in early stages, the potential for a successful displacement insurance structure that provides sufficient and quick funding for population movement crises can be transformative if it can be scaled and adapted to varying contexts.

More information:

https://airbel.rescue.org/projects/displacement-insurance/

https://rescue.app.box.com/s/1oz5x00156iy2a4deutck0ggpr4czu4c

 

Social Finance Israel’s Type II Diabetes Prevention – Pay for Success Financing

Organizations:

Social Finance Israel (SFI) is an organization that promotes capital flow from private entities towards social impact projects in Israel through innovative financing. SFI is a developer of social impact bonds and launched the first 3 social impact bonds in Israel in areas such as education and healthcare.

How it works:

Israel faces a public health issue: it is home to 500,000 diagnosed diabetics, in addition to approximately 500,000 other pre-diabetic individuals at risk of the disease. Currently, not enough resources are channeled towards preventative measures and patients often only receive treatment after they are diagnosed and conditions are more severe.

SFI partners with health organizations to structure a service that aims to prevent the onset of type II diabetes in a target population. The 5-year intervention program focuses on lifestyle modifications. Participants receive nutrition and exercise guidance and mentorship for 2 years, and their metrics are tracked and monitored for the following 3-5 years. If certain targets of the program are met, the National Insurance Institute and other public health organizations will repay investors for realized savings in healthcare and disability costs.

The initiative involves an upfront capital commitment of ILS19.4 million (~US$5.5 million) and aims to benefit 2,250 pre-diabetic beneficiaries. Apart from reducing and shifting the risk from healthcare providers to investors, the Pay for Success model also encourages innovative solutions and expertise to affect intended outcomes.

More information:

http://www.social-finance.org.il/category/Preventing-Type-2-Diabetes

https://www.brookings.edu/wp-content/uploads/2017/11/impact-bonds-for-health_slides_20171212.pdf

International Finance Facility for Immunization – Vaccine sukuk issuance

Organization:

The International Finance Facility for Immunization (IFFIm) supports the financing of immunization programs operated by Gavi through long-term pledges by donor governments and vaccine bond issuances to capital markets. Since its first issuance in 2006, IFFIm has raised bonds in international markets and have also tapped into the Islamic finance market to with its first sukuk in November 2014.

How it works:

Sukuk or Islamic bonds work similarly to conventional bond structures. However, they are structured to adhere to Islamic principles. Unlike conventional bonds in which bondholders are promised the repayment of initial principal payment and income from interest, sukuk holders are in theory not guaranteed the principal repayment, and income is derived from profits based from a tangible investment asset rather than interest. This difference in mechanism is in compliance to Islamic requirements that prohibit deriving gain from interest.

IFFIm has made 3 Islamic bond issuances to date to finance the delivery of immunization programs around the world. IFFIm issued its first sukuk in 2014, raising $500 million for children immunization efforts. The organization structured two other sukuk issuances in 2015 and 2019. The main investors in the transactions involved institutions such as the Islamic Development Bank (IsDB).

More information:

https://www.isdb.org/news/isdb-invests-us-50-million-in-private-placement-sukuk-by-the-international-finance-facility-for-immunization

https://www.iffim.org/bonds/previous-issuances/

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