Innovative financing: Funding progress in the times of Covid

January 5, 2021 5:01 AM

It’s time for India to take the lead in innovative financing mechanisms; it has much to gain on many fronts

Outcome-based financing such as ‘energy performance contracts’ can prove extremely useful to India, where energy consumption is high.

By Rama Seth

During these tumultuous times of Covid-19, innovative financing methodologies have captured the attention of international finance agencies, philanthropic organisations and institutional investors. Rather than relying solely on grants, these mechanisms help channelise investments from the private sector, generally using collaboration between the public and private sectors. Purely private initiatives have also emerged more recently.

In many countries, public health pays for health prevention and care-related costs through taxpayers’ funding. This system, though efficient in high-income countries, is less feasible in resource-limited countries that have traditionally relied on Official Development Assistance (ODA). Current financing needs surpass any amount of funding that ODA can provide.

The term ‘innovative finance’ first came into use in 2002 to describe ‘modern’ financing mechanisms from non-traditional sources for development that complement ODA but are also predictable and stable. These mechanisms use market-based financial instruments and engender collaboration between various stakeholders who did not consider each other as business partners.

One example is ‘impact investment’, which is an investment approach driven by social objectives while still operating according to the standard investment return model. They offer a midway between pure philanthropy and pure financial investment, and encourage positive developmental outcomes through market-based instruments. To date, innovative finance resources mobilised have been quite small, although they have grown from about 2% of ODA (approximately $70 trillion) to about 8% in 2020 (with approximately $140 trillion in ODA). The increase in these resources from 2 to 11 trillion in the space of a few years suggests there is scope for considerably more.

Impact investment generally involves PPPs (public-private partnerships), such as the Danish SDG Investment Fund. In this collaboration, five Danish pension funds joined a government-owned investment fund (IFU) to offer advisory services and growth capital to firms willing to set up operations in emerging markets. The fund made its first investment in a 19.1-megawatt Ukrainian solar park developed by Danish company Better Energy in January 2019, committing about one-third of the total expected investment, DKK 37 million. By contributing to commercial investments in the private sector, the fund aimed at creating sustainable businesses with positive returns.

Outcome-based financing such as ‘energy performance contracts’ can prove extremely useful to India, where energy consumption is high. The innovation comes from the investment required being cash flow positive or budget neutral. It takes the money already received by the firm from monthly utility bills and uses it to pay for energy infrastructure upgrades, facilities and improvements needed. Once the contract period expires, the investing firm then reaps 100% of the savings generated for years to come.

Firms have also utilised various forms of debt instruments such as Social Impact Bonds (SIBs) and Development Impact Bonds (DIBs). SIBs and DIBs raise financing to improve the social outcome with savings in future public costs. One of the first DIBs to be implemented in a developing country was the Educate Girls DIB, implemented in Rajasthan, India. These bonds have an inherent risk of default because firms may not reach the assigned targets by the end of the contract. Support from the government and charitable organisations can mitigate this risk. To date, developed countries have used these bonds far more than developing countries. In 2018, the UK had over 40 such bonds, but India only had a couple. The successful use of these bonds in some countries suggests that India could potentially increase their use quite a lot.

The need for this potential to be utilised is particularly so in the current pandemic times. The medical field has already used these techniques successfully. The first attempt in this direction was the establishment of the GAVI (Global Alliance for Vaccines and Immunisation) in 2000, and the development of the IFFIm (International Finance Facility for Immunisation), which employed vaccine bonds in order to fund the activities of the GAVI. Innovative finance forms about a quarter of GAVI’s total funding. The IFFIm can also engage in Advanced Market Commitments (AMCs) with private pharmaceutical organisations, in order to guarantee a market and thus accelerate the development and distribution of the product.

The UNITAID was the first attempt to establish a multilateral global investment pool by the United Nations to tackle HIV/AIDS, malaria and tuberculosis in mid- and low-income countries. The Medicines Patent Pool (MPP), set up under the UNITAID initiative, fits all stakeholders by negotiating for public health-driven licences with patent holders. Savings on HIV drugs alone negotiated by the MPP are estimated to be $2.3 billion (net present value) by 2028.
In the wake of the Covid-19 pandemic, the UNITAID has identified opportunities such as the Access to COVID-19 Tools (ACT) Accelerator to make diagnostics, therapeutics and vaccines for Covid-19 accessible to everyone who needs them worldwide. Currently, 38 member countries are a part of the UNITAID initiative, but not India.

Organisations that have used alternative finance have generally performed well after fundraising, with most of them reporting increases in employment, volunteering, turnover and profit (NESTA). In the face of the Covid-19 challenge, it becomes increasingly essential to pool demand and purchase activities. Increasing the certainty of demand will serve to reduce prices for customers. The forecasting of strategic direction and further engaging in market commitments will enable manufacturers to plan production more efficiently. Coordination amongst countries is key to sharing timely, transparent and accurate information on demand and supply. It is time for India to take the lead in these initiatives, and it has much to gain on many fronts.

(The author is professor, Finance and Control, IIM Calcutta)

 

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Tech-ing diagnostics forward: Connected, AI-driven wearables could mean greater access
2Skating on thinning ice! India faces a double whammy of coastal inundation and drying glaciers
3WEF ranks infectious diseases as the world’s top risk; but the long-term risk is climate change