DEVFIN ADVISERS
INNOVATIVE FINANCE
Gap analysis
REPORT TO SIDA
June 2014
i
Content
EXECUTIVE SUMMARY.................................................................................................... I
LIST OF ACRONYMS ...................................................................................................... IV
1
2
3
INTRODUCTION...................................................................................................... 1
1.1
Background .................................................................................................. 1
1.2
Swedish policy context.................................................................................. 1
1.3
Structure of the report ................................................................................... 3
DEFINING AND STRUCTURING INNOVATIVE FINANCE ..................................... 4
2.1
Definining innovative finance ........................................................................ 4
2.2
Different ways to classify innovative finance ................................................. 6
2.3
A typology for sida ........................................................................................ 7
INNOVATIVE FINANCE IN SIDA............................................................................. 9
3.1
Guarantees ................................................................................................... 9
3.2
Development loans ..................................................................................... 14
3.3
Private-public development partnerships .................................................... 16
3.4
Challenge funds .......................................................................................... 19
3.5
Output-based aid ........................................................................................ 22
3.6
Private public multi-donor funds .................................................................. 25
3.7
Direct investments ...................................................................................... 28
3.8
Development impact bonds......................................................................... 29
3.9
Sida cases .................................................................................................. 30
3.9.1
Global Health Investment Fund (GHIF) .................................................. 31
3.9.2
Pledge Guarantee for Health (PGH) ....................................................... 32
3.9.3
African Risk Capacity Initiative (ARC)..................................................... 33
4
INNOVATIVE FINANCE INTERNATIONALLY ...................................................... 34
5
STRATEGIC ALLIANCES IN INNOVATIVE FINANCING...................................... 37
6
7
5.1
USAID ........................................................................................................ 37
5.2
Gates Foundation ....................................................................................... 38
5.3
Swedfund.................................................................................................... 39
5.3
Potential partnerships .................................... Error! Bookmark not defined.
CHALLENGES FOR SIDA IN INNOVATIVE FINANCE ......................................... 42
6.1
Organisational challenges ........................................................................... 42
6.2
Challenges within Sida’s results strategies ................................................. 46
FURTHER STUDIES.............................................................................................. 50
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ANNEX 1: TERMS OF REFERENCE ............................................................................. 51
ANNEX 2: DETAILS OF THE SIDA INNOVATIVE FINANCE CASES ............................ 52
The Global Health Investment Fund (GHIF) ........................................................... 52
The Pledge Guarantee for Health (PGH) ................................................................ 54
African Risk Capacity Initiative (ARC) .................................................................... 57
ANNEX 3: SOME ASPECTS OF INNOVATIVE FINANCE INTERNATIONALLY ........... 59
ANNEX 4: A COMPARISON BETWEEN THE CONCESSIONARY CREDITS AND THE
CURRENT LOANS AND GUARANTEES .............................................................. 72
ANNEX 5: DEVELOPMENT OF LOCAL CAPITAL MARKETS ...................................... 73
i
EXECUTIVE SUMMARY
Objective and approach: The purpose of this report is to provide Sida with a structured
overview from which it can further expand and streamline innovative forms of finance in
development cooperation. Two main drivers contribute to growing demand for innovative
approaches to financing development. First, there is international recognition that global
development needs cannot be met by traditional Official Development Assistance (ODA)
alone, but must be supplemented with private and commercial capital. Funds also need to
be deployed as efficiently as possible, motivating innovative mechanisms and design of
development activities. Second, Sida is increasingly measured by its results, not its
activities, approaches, and disbursements. Growing attention to results is mirrored by
larger flexibility in approaches, with substantial room for new and innovative finance.
This report provides an overall definition of innovative finance as well as classifications
and parameters to help analyse and understand different forms of innovative finance. It
draws extensively from international discourse as well as interviews with Sida staff and
development practitioners in international development agencies. The study further maps
and discusses Sida’s experiences to date as well as opportunities and challenges going
forward both with respect to Sida internally and in Sida’s relations to her international
partners.
Definition and typology: Innovative finance describes mechanisms that leverage or
deploy funds in new ways for development purposes. The Sida definition is that
“Innovative finance aims at mobilizing private capital resources – both market-based and
philanthropic – for development through new forms of financial solutions”. The report also
presents relevant parameters and possible classifications within these definitions.
Innovative finance can be understood in terms of the needs it addresses, the stage in a
project’s lifecycle where it intervenes, and the instrument it deploys. The main
classification variable in this review is by type of instrument. Similar instruments can be
used across sectors and countries.
Sida’s experience in innovative finance: The study maps Sida’s experiences in seven
categories of instruments and assesses them against six parameters to describe their main
features of innovation. Sida’s most employed instrument in innovative finance is its
independent guarantee scheme, included in Sida’s instruments in the late 1990s and made a
permanent feature in 2009. Its first guarantee of this nature was issued to a telecom
company in Uganda, allowing the company to roll out a rural mobile network. It was also
the first corporate bond in the country. What was seen a high risk commercial venture,
became a success not only for the telecommunication company, increased the availability
of mobile phones in rural areas for the poor, but also for Sida as the guarantee expired
without cost to the Swedish tax payers. The underlying transactions for which Sida has
issued guarantees, have performed well to date without incurring any substantial losses. In
fact they have created a net revenue stream to the Swedish government from the risk-based
premiums paid by the organisations provided a guarantee. Guarantees are potentially an
extremely cost-effective form of development assistance, assuming that the risks are well
managed. In an international perspective, the Sida guarantee instrument is still a largely
unique instrument due to its flexibility and versatility in application. This instrument has
made Sida an attractive partner for development agencies and philanthropic foundations as
a complement to their efforts in innovative finance. For example, USAID, which has a long
ii
history of providing similar guarantees, signed in 2010 a Memorandum of Understanding
with Sida for large-scale cooperation. Since then a number of co-signed guarantees have
been implemented. A renewed MoU for an expanded cooperation was signed in 2013. The
Sida guarantee instrument has also been a key reason for the close collaboration with the
Bill and Melinda Gates Foundation in the health sector since 2010. In recent years Sida has
expanded its guarantee portfolio in different directions including advance market
commitments, first-loss guarantees and reinsurance.
Sida and the Swedish government also engage in other forms of innovative finance, inter
alia challenge funds, private-public partnerships, and results based financing, particularly
output-based aid. Sida was one of the pioneering donors in the Private Infrastructure
Development Group (PIDG) in the early 2000s. Under PIDG a series of facilities to
promote private investments in infrastructure especially in Sub-Saharan Africa have been
established. PIDG has demonstrated ability to leverage considerable amounts of private
financing for investments in energy and other infrastructure in order to increase the access
of such services to poor people in the poorest nations of the world. In the initial stage, Sida
influenced PIDG, through the GuarantCo facility, to be an instrument for local capital
market development in addition to infrastructure development.
Challenge funds have proven effective in mobilising commercial enterprises and other
entities over the world for selected high priority ventures in development countries. These
funds have been applied in a variety of ways such as to promote innovations for the
Bottom of the Pyramid, in agro-business and energy in Africa, for water innovations, in
business development in conflict countries, for peace initiatives, for democratic
development, and mobilising diasporas for investments in their home countries. Sida is
both developing challenge funds on its own and collaborating with others in such ventures,
for example with USAID in its grand challenge funds.
In addition, Sida has been operating a Public-Private Development Partnership program
(PPDP) for a few years in which Sida and larger companies cooperate and co-finance
development projects of relevance to both Sida and the company’s partners. This is taking
place in vocation training, human rights, teaching coffee producers to adapt their farming
techniques against climate change and so on. The program, which is open to companies
from anywhere in the world, has been essential to engage Swedish multinationals such as
H&M, Scania, Tetra Laval and Volvo in a positive and constructive dialogue, taking the
companies’ Corporate Social Responsibilities to new levels. The PPDPs assume three party
collaborations, for example with NGOs, government entities or UN agencies as
implementing agencies, thus avoiding subsidizing the commercial companies and rather
leveraging ODA funds with private capital.
Main strengths: Sida’s strengths in innovative finance are an overall culture of pioneering,
a positive attitude in the government for innovation and a flexible, responsive and often
informal dialogue between the Ministry of Foreign Affairs and Sida, allowing for
experimenting with new approaches. In general, the flexibility and the versatility of the
innovative financing instruments used by Sida are considerable, making them useful tools
in the Government’s new results-strategies. To date, innovative finance has been most
typically deployed in areas that require public and private sector entities to work together,
such as energy and environment, infrastructure, business development, agriculture and,
most importantly, health. Yet emerging experiences and opportunities also exist in
thematic areas such as democracy, human rights, peace, security and education.
Challenges going forward: Challenges include maintaining and promoting a pioneering
culture, combined with sufficient perseverance and patience to let ideas be tested,
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readjusted, and mature. Sida also needs to find the right balance between partnering with
international leading agencies on the one hand, and cultivating its own initiatives on the
other. The latter is important to build and retain crucial competence and experience over
time. Narrowing the distance between specialization in innovative instruments at the center
and operational responsibility and funding allocations at the embassy level is also an
important challenge. Moreover, the study observes missed opportunities for fruitful
synergies between Sida and Swedfund. In many countries, innovative and effective
solutions emerge in the nexus between donor agency and Development Finance Institutions
(DFIs). Finally, Swedish authorities need to stay alert to adequate capital reserves and risk
weighted pricing of its guarantee instruments.
Going forward, the report also recommends looking further into international experiences
and exploring additional partnerships, at home and internationally.
iv
LIST OF ACRONYMS
AACF
ADB
AECF
AfDB
AGF
AMC
ARC
ATI
AusAID
BiH
BITS
BMGF
BMZ
BOT
CAFEF
CC
CDC
CF
DAC
Danida
DCA
DFID
DFI
DGIS
DIB
EAIF
EIB
EKN
ESG
FDI
FMO
GAP
GAVI
GET FiT
GHIF
GIZ
GPOBA
IAP
ICT
IDA
IFAD
IFC
IFFIm
IFI
KFW
L&G
MAVC
African Agricultural Capital Fund
Asian Development Bank
Africa Enterprise Challenge Fund
African Development Bank
Africa Guarantee Fund
Advance Market Commitment
The Africa Risk Capacity (Initiative)
Africa Trade Insurance Agency
Australian Agency for International Development
Bosnia Herzegovina
Board of Technical and Economic Cooperation (of Sweden)
Bill and Melinda Gates Foundation
German Development Ministry
Build Operate Transfer
Conflict Affected and Fragile Economies Facility
Concessionary Credits
Commonwealth Development Corporation
Challenge Fund
Development Assistance Committee (of OECD)
Danish International Development Agency
Development Credit Authority (of USAID)
Department for International Development (of the United Kingdom)
Development Finance Institution
Directorate-General for International Cooperation (of the Netherlands)
Development Impact Bond
Emerging Africa Infrastructure Fund
European Investment Bank
Swedish Export Credits Guarantee Agency
Environment, Social and Governance
Foreign Direct Investment
The Dutch Development Bank
Green Africa Power
Global Alliance for Vaccines and Immunization
Global Energy Transfer-in Tariff
Global Health Insurance Fund
German Agency for International Cooperation
Global Partnership of Output-Based Aid
Innovations Against Poverty
Information and Communications Technology
International Development Association
International Fund for Agriculture Development
International Finance Corporation
International Facility for Immunisation
International Finance Institution
Kreditanstalt fuer Wiederaufbau (the German Development Bank)
Loans and Guarantees
Making All Voices Count
v
MDB
MDG
MIGA
MOU
Nefco
NIB
OBA
ODA
OECD
PGH
PIDG
PPDP
PPP
PSI
R&D
RBF
SECO
SEK
SME
SPV
SDR
SSA
ToR
WEF
Multilateral Development Bank
Millenium Development Goals
Multilateral Investment Guarantee Agency
Memorandum of Understanding
Nordic Environment Finance Corporation
Nordic Investment Bank
Output-Based Aid
Official Development Assistance
Organization for Economic Cooperation and Development
Pledge Guarantee for Health
Private Infrastructure Development Group
Public-Private Development Partnership
Public-Private Partnership
Private Sector Investment
Research and Development
Results-based financing
State Secretariat for Economic Affairs (of Switzerland)
Swedish Export Credit Corporation
Small and Medium-sized Enterprise
Special Purpose Vehicle
Special Drawing Rights
Sub-Saharan Africa
Terms of Reference
World Economic Forum
1
1
INTRODUCTION
Innovative finance is an increasingly broad term used to describe new ways of funding
development; both leveraging funds and putting them to good use. The purpose of this report
is to provide Sida with a structured overview from which it can further expand and streamline
innovative forms of finance in development cooperation. Annex 1 provides the Terms of
Reference.1
This chapter presents the rationale and objective of the report. It also summarizes the
historical background from an international perspective as well as setting out the context
for Sida that constitutes the rationale for exploring innovative finance in more detail.
1.1
BACKGROUND
In 2002, the UN International Conference on Financing for Development in Monterrey
coined the term Innovative Finance. The concept emerged from a rising concern over how
to fill the gap between the investments required to achieve the Millennium Development
Goals (MDGs) on the one hand and what can realistically be mobilised through Official
Development Assistance (ODA) and other public funds on the other. Thus, innovative
finance would generate funds additional to ODA for development purposes.
In 2006, at the Paris Conference on Innovative Sources for Financing of Development, 44
countries, various international organisations, private foundations and civil society
representatives formed the Leading Group for Innovative Financing of Development. Its
purpose has been to share experiences on different models of innovative financing,
especially mechanisms such as global taxes. The group has expanded to 67 countries today
(Sweden is not part of the group). In 2011, the Busan High Level Forum Declaration asked
for a renewed and more systematic attempt to put private capital flows, investments and
innovative financing mechanisms to work for development together with ODA. In
addition, the UN, the World Bank Group, the OECD and other multilateral organisations
have played leading roles over the last decade in discussing what innovative financing is
and how it to promote it.2
As the international development community is preparing for the post-2015 Development
Framework Agenda, the issue of additional funds for financing development is likely to be
further reinforced. While considerable achievements have been made towards some of the
MDGs, new development issues have emerged requiring large capital investments, such as
dealing with climate change.
1.2
SWEDISH POLICY CONTEXT
Three specific Swedish Government instructions and policies provide further context for
the review:
1
This review is, according to the ToR, the first of two phases. In the second phase, Sida will further elaborate
on selected topics, prioritizing and operationalizing its strategies and approaches to innovative financing.
2
See, for example UNDP (2012): Innovative Financing for Development: A New Model for Development Finance?
2
First, in July 2013, the Swedish Government introduced a new model for result-strategies
that would govern the development cooperation with Sida’s partner countries, the
multilateral organisations and for thematic areas.3 The guiding principles are that Swedish
ODA shall be innovative, results-based, cost-effective, and provided with a long-term
perspective. A lead theme is that the results-strategies should have a stronger focus on
defining concrete results for Sweden’s ODA and measuring the achievements of such
results. These results should also be focused on thematic areas, rather than conventional
sectors.
Second, in December 2013, the Swedish Government instructed Sida to present the
organisation’s activities concerning the development of innovative financial mechanisms.
This should include an analysis of the opportunities for Sida to increase the use of
modalities such as loans and guarantees, challenge funds, funds and direct investments, as
well as new combinations of instruments and actors. Sida should also explain how the
organisation can use innovative financing and development modalities more effectively, as
well as how it can cooperate with other relevant actors in this field such as Swedfund.4
This review is underway and the present report is a contribution.
Third, in March 2014, the government proposed a new Development Assistance Platform,
that will govern the policies and strategies for Swedish ODA and in which the resultsorientation was emphasized and the development objectives further elaborated as indicated
in the figure below:
Figure 1: The Swedish development assistance platform5
3
Ministry of Foreign Affairs: Guidelines for Results-strategies in Swedish Development Assistance 2013.07.11
Ministry of Foreign Affairs: Instruction to Sida for 2014. Government Decision 2013.12.19
5 Inofficial translation from Swedish
4
3
Together, these directions provide a strengthened rationale for deploying innovative
financing mechanisms in Sida and in partnership with other agencies. A stronger emphasis
on Sida’s results relative to its activities can be interpreted as more flexibility on the latter.
In other words, as long as progress is made on results, Sida can design, use, and package
various instruments with significant versatility and flexibility.
1.3
STRUCTURE OF THE REPORT
The report consists of seven chapters structured as follows:

Chapter 2 presents evolving definitions of innovative finance and proposes a working
definition for Sida, as well as a classification of mechanisms in light of various
international typologies

Chapter 3 discusses Sida’s experiences in innovative finance and presents examples
including selected in-depth case studies

Chapter 4 presents the international experience and selected international cases

Chapter 5 presents international agencies that are current or potential partners to Sida
in innovative finance

Chapter 6 discusses challenges to Sida in scaling up and expanding its innovative
finance portfolio

Chapter 7 proposes topics for further analysis in phase two.
4
2
DEFINING AND STRUCTURING INNOVATIVE
FINANCE
This chapter reviews international definitions and presents the Sida definition of innovative
finance. The chapter also presents relevant parameters and possible classifications within
these definitions.
2.1
DEFININING INNOVATIVE FINANCE
Innovative financing covers a broad range of approaches and includes diverse forms such
as thematic global trust funds, public guarantees and insurance mechanisms, equity
investments, growth-indexed bonds, countercyclical loans, distribution schemes for global
environmental services, microfinance and meso finance, and so on.6 While innovative
finance initially was associated with the means of attracting additional funds to ODA for
development, the term has been expanded to capture ways of providing more effective
development assistance by engaging new actors with different skill sets and using various
forms of market-mechanisms, sometimes referred to as ‘smarter aid’. This means that
innovative finance encompasses both new and more efficient ways of sourcing funds and
new ways of deploying them.
There is no commonly agreed definition of innovative finance in the donor community.
Different organisations have put forward their own understanding and use of the term. Four
examples, summarized in Table 1, illustrate the range of prevailing definitions and
interpretations.
Table 1: Examples of innovative finance definitions
Institution
Year
Definition
World
Bank
2009
Innovative financing involves non-traditional applications of solidarity, PPPs, and catalytic
mechanisms that support fund-raising by tapping new sources and engaging investors
beyond the financial dimension of transactions, as partners and stakeholders in
development or deliver financial solutions to development problems on the ground.
World
Bank
2013

Generate additional development funds by tapping new funding sources (that is,
by looking beyond conventional mechanisms such as budget outlays from
established donors and bonds from traditional international financial institutions)
or by engaging new partners (such as emerging donors and actors in the private
sector);

Enhance the efficiency of financial flows, by reducing delivery time and/or costs,
especially for emergency needs and in crisis situations; and

OECD
6
2010
Make financial flows more results-oriented, by explicitly linking funding flows
to measurable performance on the ground.
Suggesting innovative financing as a means of raising funds or stimulating actions in
support of international development that go beyond traditional spending approaches by
either the official or private sectors, such as:

new approaches for pooling private and public revenue streams to scale up or
develop activities for the benefit of partner countries;

new revenue streams (e.g. a new tax, charge, fee, bond raising, sale proceed or
United Nations (2009), Report of the Commission of Experts of the President of the United Nations General Assembly
on Reforms of the International Monetary and Financial System
5
voluntary contribution scheme) earmarked to developmental activities on a multiyear basis;

United
Nations
2011
new incentives (financial guarantees, corporate social responsibility or other
rewards or recognition) to address market failures or scale up ongoing
developmental activities.7
To be effective, mechanisms should aim to mobilize resources that are stable and
predictable, should supplement and not be a substitute for traditional sources of financing,
should be disbursed in accordance with the priorities of developing countries and should
not unduly burden such countries.
Figure 2 illustrates the different elements that comprise the concept of innovative finance,
where innovative finance can take place in either circle or in the intersection between the
two.
Figure 2: Different definitions of what Innovative finance include
Innovative finance is also a relative term in time and across agencies. Some previously
“innovative” financing mechanisms created 10-15 years ago are now part of the standard
development financing landscape and are no longer innovative. Successful new
mechanisms used today are also likely to become traditional instruments to fund
development. In addition, what is innovative in one institution may be standard practice in
another. The process, perception and list of innovation financing mechanisms are dynamic
in nature.
Sida currently operates with a definition of innovative finance presented below. Following
the discussion on the draft report, Sida found that there is no reason to alter their definition.
Consequently, it constitutes the starting point for this report and its analysis.
Box 1: Sida's definition of innovative finance
Innovative finance aims at mobilizing private capital resources – both market-based and
philanthropic – for development through new forms of financial solutions. Financing
solutions may involve the use of development loan and guarantee arrangements.8
7
8
Sandor, Scott and Benn: Innovative Finance to Fund Development: Progress and Prospects (OECD Brief 2009)
Sida’s current website www.sida.se
6
2.2
DIFFERENT WAYS TO CLASSIFY INNOVATIVE FINANCE
Within the above definition of innovative finance, it is useful to establish certain
parameters for assessing different forms of innovative finance. Approaches to innovative
finance vary by how funds are mobilised, what they are used for, and how they are used,
among other things. For example, the UNDP has suggested four broad categories of the
development of innovative finance:
1. Taxes, dues or other obligatory charges on globalized activities: this includes
initiatives such as the airline ticket tax which is levied at the national level but
within a framework of international coordination. The revenues raised are allocated
to international development. Proposals for a financial transactions tax and carbon
taxes are also examples that fit into this category. These initiatives generate new
public revenue streams for development from the private sector.
2. Voluntary solidarity contributions: under such initiatives, consumers are given
the option to donate a small sum to international development at the point of
product purchase (e.g. an on-line hotel reservation). Although private in nature,
public authorities facilitate such contributions through tax incentives and technical
facilitation in the distribution of resources. Examples include Product (RED) and
the Global Digital Solidarity Fund.
3. Frontloading and debt-based instruments: an initiative which ‘frontloads’
resources to make public funds available earlier for development. It does this via
the issuance of bonds on international capital markets. The International Finance
Facility for Immunization (IFFIm) is one example. Mechanisms which ‘frontload’
public resources for development generate liabilities that are reportable as aid in
several years’ time, i.e. when the liabilities fall due. Other debt-based mechanisms
include debt conversions (which reduce the amount of debt and debt service
payable thereby freeing-up additional resources for development expenditures),
diaspora bonds (a debt instrument—issued by a country, a sub-sovereign entity or a
private corporation—to raise financing from its overseas diaspora) and socially
responsible or ‘green’ bonds (bonds which target investors who wish to invest in
development or environment initiatives and so may accept lower rates of return).
4. State guarantees, public-private incentives, insurance and other market-based
mechanisms: this includes initiatives which leverage public funds to create
investment incentives for the private sector, for instance through state subsidies or
commitments to purchase a particular product at a set price (e.g. a vaccine). In so
doing, these initiatives aim to correct market failures. Other mechanisms aim to
reduce sovereign risk and/or macroeconomic vulnerabilities, such as weather-based
insurance or counter-cyclical loans (i.e. they aim to improve the effectiveness of
finance rather than create new revenue streams for development).
Figure 3 summarizes the four categories and their main characteristics.
7
Figure 3: Four categories of innovative finance
Source: UNDP. Interpreted and elaborated by Devfin
The above categories are broad and encompass both different ways of mobilizing and using
funds. Within each category a wide range of specific tools are possible. As illustrated, only
the latter two are of interest to Sida. The first category encompasses taxes and other
obligatory charges that are outside the prerogative of the Swedish government. 9 In terms of
the second category, voluntary contributions, Sida might encourage such initiatives, but
they exclude by definition ODA, hence this is not part of Sida’s work. This report therefore
concentrates on innovative financing within categories 3 and 4 above, where a number of
approaches exist, inter alia loans, grants, insurances, grants, bonds, vouchers, advancemarket commitments or other results-based funds, as well as various forms of subsidies.
2.3
A TYPOLOGY FOR SIDA
The instruction to Sida by the Swedish Government referred to earlier has an implicit view
of what is considered innovative financing. This instruction includes the terms loans and
guarantees, challenge funds, funds and direct investments, as well as new combinations of
instruments and actors. In preparation for the instruction to Sida, the Ministry of Foreign
Affairs reviewed the concept and identified in an unofficial paper the following categories
of instruments:
Table 2: Types of instruments
Instrument
Definition and use in Swedish aid
Guarantees
An insurance against risk, issued by a government. Applied in Swedish aid since the 1980s.
Development
loans
Sida is not providing loans by itself, but providing subsidies of loans issued by other financial
institutions under its Development Loan facility. There is a proposal to expand this facility,
allowing Sida to also issue development loans.
9
The Swedish government has not engaged in any of these initiatives and is not in general in favour of global taxes of
this nature. This is also one of the reasons why Sweden has not joined the Leading Group for Innovative Financing.
Its argument against global taxes and levies is that taxes are a prerogative of national governments, and could be
perceived as a way of circumventing the multilateral agreement of allocating 0,7% of GDP to ODA.
8
First-loss
applications
Reducing risks through a guarantee or insurance. Applied by Sweden using the guarantee
instrument sometimes combined with grants since the late 1990s
Advance market
commitments
Front-loading to stimulate development.. Applied by Sweden using the guarantee instrument
sometimes combined with grants.
Private-Public
Partnerships
Partnerships of different kinds between ODA and private entities with joint financing.
Example: Sida’s Public-Private Development Partnership program (PPDP). Fund facilities,
such as PIDG, can also be classified under this label.
Challenge funds
A competition for grants or soft loans against set criteria among commercial or other entities.
Used by Sida since 2010.
Global taxes
A levy on airline tickets or ICT contracts, for example. As noted earlier, Sweden is not
applying this instrument, nor is the Government in favour of them.
Emission rights
The revenues derived from, for example, selling emission of carbon dioxide by governments
can be applied partly or totally for financing aid. Sweden is not applying this instrument.
Development
impact bonds
Provide upfront funding for development programs by private investors, who are remunerated
by donors or host-country governments—and earn a return—if evidence shows that programs
achieve pre-agreed outcomes. Not yet applied in Sweden, but subject for interest in how it
could be applied.
Based on the above, the following classification by instrument will structure the discussion
of Sida’s experience in Chapter 3:
1. Guarantees (used for different risk mitigation purposes and various structures such
as front-loading, insurances, first-loss applications, etc.)
2. Development loans
3. Public-Private Partnerships, which might include fund facilities for different
purposes (see below), or specific co-financing with single private companies as in
Sida’s PPDP programme
4. Challenge Funds
5. Results Based Financing (RBF), principally Output-Based Aid (OBA)
6. Private-Public multi-donor fund facilities
7. New instruments, including direct investments and impact bonds.
In addition, the qualities of each approach vary as what it is trying to achieve. For example,
some instruments are measured by their ability to leverage private capital, while others are
more meaningfully assessed in terms of how well they can replicated or be scaled up in
other contexts, countries or sectors. Some instruments allow for the same capital to be used
over again, while others are finite in their use but their success depends on their ability to
generate better and more measurable results. For the purpose of this review, we suggest six
parameters as a means of assessing Sida’s innovative financing mechanisms in all the
seven categories of innovative finance:
Box 2: Parameters for assessing innovative finance
Leveraging: (Swedish) ODA is leveraging other forms of funding in the sense of adding to ODA,
the higher the degree of leverage, the better
Catalytic: Sida’s engagement triggers other actors or use of funding in different contexts
Pioneering: Sida is involved in new ways of funding and financing mechanisms
Replicable: Can be scaled up to larger size or in other places
Measurable: it is possible to ex-ante define desired results, and ex-post determine to what degree
such results were achieved
Recyclable capital: the re-use of the Sida guarantee reserve or that donor-contributed funds are
returned to implementing entity and redeployed
9
3
INNOVATIVE FINANCE IN SIDA
This chapter presents the different instruments in innovative finance listed above and how
they are being applied by Sida. For each instrument, we give examples from Sida’s current
portfolio, results and lessons learned, as well as challenges in scaling up the use. At the end
of the chapter we provide three examples of Sida innovative finance more in detail.
3.1
GUARANTEES
Background
Sweden has offered guarantees alongside concessionary export credit since the 1980s,
initially managed by the Swedish Export Credits Guarantee Board (EKN).
In 1999, the Government allowed Sida to offer guarantees catalytically and independently
on a trial basis and to use the guarantee instrument as a principal aid tool. The first
independent guarantee supported a local market bond issue in Uganda that funded the rollout of the mobile telephone system into the rural areas. This company (and the bond issue)
was a commercial success and the operator/beneficiary repaid the bond before its maturity.
The second successful guarantee supported the financing for the Maputo harbor in
Mozambique, involving the Swedish company Skanska. While the rate of providing
independent guarantees was slow, it gave rise to other innovative developments. First, it
became a development priority to deepen and broaden local capital markets and support
local currency transactions. Second there was an initiative to create a limited liability
company, GuarantCo, with the mandate to provide local currency guarantees to cover risks
in infrastructure projects.
In 2009, a new government regulation made the independent guarantees a permanent
feature of Sida’s toolbox, creating a new impetus to innovate. Guarantees were
increasingly integrated in the overall aid dialogue and Sida staff was encouraged to look
for new solutions and test the limits of the system. Annex 4 elaborates on a comparison
between the loans and guarantees provided under the Concessionary Credit scheme and the
new Guarantee Scheme, showing the significant expansion in usefulness of the latter.
Summarized below are different types of independent guarantee applications:

First loss guarantees Philanthropic investors became new partners with whom to
share project and financing risks. They typically have a private sector approach and
prefer to structure their investments with a first loss platform to achieve high social
returns in exchange for assuming substantial downside financial risks. They are
willing to take the riskiest part of the capital structure, which is typically equity or
quasi-equity. They use this base to attract others to less risky layers of a fund (and
for which they will receive a more limited return). The investors are used to seeing
“waterfall” financing models where loan tranches are structured according to risks.
Sida guarantees that take the first-loss risk means that they have some
characteristics of equity risk without the ownership responsibilities. There are
several examples of first loss guarantees in Sida’s portfolio. In the Global
Microfinance Consortium Sida, for example, shares the first loss risk on a paripassu basis with the social investment arm of Deutsche Bank. This leverages in
other investors with less risk appetite to participate (European Investment Bank,
KfW, the pension fund Storebrand, etc). A proxy for guarantees is placing liquid
funds into an escrow account which serves as a collateral for a loan. This technique
10
has been adopted in the case of EcoEnergy in Tanzania, where a bridging finance
loan will enable growers of sugar cane to have an early start and to avoid the loss of
one planting season. (If a conditional loan instrument had been available it would
presumably have been more advantageous for Sida and for the beneficiaries than
the adopted escrow account solution – see section 3.2.)

Advance Market Commitments (AMCs) AMC models have been applied to
health products where it is recognized that direct R&D funding and public-private
partnerships must be complemented with efforts to build a market that provides
acceptable commercial returns. The creation of such a market would move R&D on
neglected diseases out of the domain of philanthropy and into commercial business
models with the objective of broader innovation and sustained manufacture. Sida
has joined with six other partners10 to use its guarantee instrument to create an
AMC volume guarantee mechanism with the Gates Foundation. Two
pharmaceutical companies, Bayer and Merck, will manufacture and deliver longacting reversible contraceptives in volume (27 million and 13 million respectively)
at prices which are far below the prices on developed markets because of the
guaranteed volumes. The collective efforts of the partners also enabled better
pricing than what individual donors achieved through separate negotiations.

Reinsurance Reinsurance as a guarantee mechanism is applied in situations where
there are insurance or guarantee instruments in place that in turn seek reinsurance to
limit their risk. Sida is actively considering entering into two different
arrangements where natural disasters would cause humanitarian crises. A panAfrican contingency risk pool or African Risk Capacity (ARC) is being established
under the aegis of the African Union with technical support of World Food
Program, whereby African governments will have a mechanism to rely on as an
instant support in the event of severe drought. A similar index-based financing
system has been suggested with the purpose to mitigate flood disasters in
Bangladesh. More traditional reinsurance would also be used for the African
Guarantee Fund, a newly established mechanism mandated to provide risk cover
for SMEs in Sub-Saharan Africa. In addition, the Africa Trade Insurance Agency
(ATI) guarantees trade transaction in Eastern Africa, including political risk and
risk of breach of utility contract. ATI reinsures its guarantees in the commercial
market.
Sida in an international context
Many International Finance Institutions (IFIs) provide different forms of guarantees.
However, as most guarantees products are more complex instruments than loans, they
generally require more resources to structure and execute, with the possible exception of
standard political risk guarantees. Consequently, their use is more limited and best fit
larger scale projects. The World Bank Group provides various types of guarantees, which
mitigate risk such as political and regulatory uncertainties. Their guarantee instruments are
partial risk guarantees, partial credit guarantees and policy-based guarantees. To date, the
World Bank has approved 28 guarantees. MIGA provides political risk guarantees but does
not cover commercial risks. Sida collaborates with MIGA in the CAFEF project, which
10
Gates Foundation, Norway, DFID, USAID, Children Investment Fund Foundation, and Clinton Investment Funds
Foundation
11
uses its standard guarantee product. The International Finance Corporation also offers
partial credit and partial risk guarantees to private companies.
With the exception of USAID and Sida, no bilateral aid agency appears to have an active
guarantee program. Other aid agencies can provide guarantees when requested. For
example, Norway participated in the Gates Volume Guarantee, described below.
Similarly, many DFIs include guarantees as a product but they are rarely used. Guarantees
only represent 2 % of the combined portfolio of the European DFIs. Swedfund has no
guarantees on its books.11 In summary, Sida can rightly claim to be unique in its guarantee
operations. Part of its uniqueness is the flexibility of its instrument, as illustrated in other
sections of this report.
Sida’s guarantee portfolio
Sida has a portfolio of approximately twenty guarantees since the new Loan and Guarantee
instrument was established in 2009. A number of these have been developed in cooperation
with USAID as a strategic partner. Below are some examples of Sida guarantees which fit
well within the concept of innovative finance. Some of these are already approved, while
others are in the planning stage.
11

The Global Health Investment Fund (GHIF)12 Ongoing R&D in the health has led to
numerous innovations ripe for late stage clinical trials, however funding for this last stage
has been lacking. GHIF has been established to bring 10 new products through late stage
trials to market. The Gates Foundation and Sida have established a ten-year guarantee
facility in order to mobilise capital to support the fund. On the basis of their support,
US$108 million was raised from charitable capital sources, institutional investors, pension
funds, pharmaceutical companies, DFIs and donors. A three-tranche guarantee structure
covering US$ 60 million is shared by the Gates Foundation and Sida. For details, see 3.2
below.

The Pledge Guarantee for Health (PGH) has been developed to improve the financial
efficiency of donor funding using commercial funds to bridge the gap between donor
pledges for health and actual disbursement. PGH will finance the time period, which could
be as long as six to nine months, in order to expedite the delivery of the goods or services
in a timely and predictable fashion to Ministries of Health and their supported institutions.
Commercial banks will provide the financing against the donor pledges, supported by a
50% guarantee jointly granted by Sida and USAID on a pari-passu basis. By providing a
stable time frame for procurement, producers are able to plan production and logistics and
pass through some of the reduced costs to the recipient countries. The guarantee facility has
a five-year term. For details, see 3.2 below.

A volume guarantee with Gates Foundation13 According to UN statistics more than 200
million women and girls in developing countries have no access to affordable
contraceptives while of 600 million women who use contraceptives for short time use have
no access of long lasting means of preventing unwanted births. The manufacturers Bayer
and Merck have access to an implant technology accepted by WHO and would be prepared
to provide them on a massive scale at a reasonable price. Through a partnership of several
donor agencies and philanthropic organisation and with a guarantee provided by Sida,
EDFI annual report 2012
Award winner in Financial Times/ IFC Awards in innovativ financing for development 2014
13 Runner up in Financial Times/ IFC Awards in innovativ financing for development 2014
12
12
Norway, Gates Foundation and Children’s Investment Fund Foundation (CIFF) the prices
for implants will be reduced by half.

Conflict Affected and Fragile Economies Facility (CAFEF) Fragile and conflict-affected
countries have serious difficulties in attracting FDI as investors sheer away from the
political risks linked to investments in the risky states. CAFEF is intended to have a
catalytic effect by adding investment protection enabling investors, contractors and
suppliers to enter the markets. A trust fund has been created by MIGA to provide political
risk insurance and to expand their capacity to offer insurance in these countries. The trust
will include three layers, in which Sida along with Canadian CIDA, DFID and MIGA share
the first layer, Sida comes alone in the second layer, while MIGA and private sector take
the third layer. All in all the facility is for US$ 440 million of which bilateral donors take
US$ 90 million while MIGA and reinsurers share the rest.

African Guarantee Fund (AGF), a pan-African guarantee scheme has been established by
Danida and African Development Bank and with the participation of the Spanish
government. Through AGF, commercial banks and financial institutions across Sub-Sahara
Africa can get portfolio and individual loan guarantees as well as equity guarantees. The
demand for AGF guarantees has been so high that the initial capital of US$ 50 million has
been committed as well as its leverage potential of 1:3. DFID will most likely provide
additional capital. Sida is considering a co-guarantee or counter-guarantee and thereby
enabling AGF to expand its activities. Participation with Swedfund may be considered as
further described below.

The African Risk Capacity (ARC) is proposed to be a pan-African insurance system,
whereby a member country and its affected population suffering from serious draught
would get an immediate compensation for their losses. It is based on the premise that a
drought does not occur simultaneously in several countries over Africa. To date, 24 African
countries have signed the establishing protocol. It has been ratified by six countries and
should become operational within a short time. KFW has announced its commitment while
DFID is likely to do that soon. Sida would provide a reinsurance cover along with private
sector reinsurers. For details see 3.2.

A guarantee for Asian Development Bank (ADB) is being prepared with the purpose of
guaranteeing part of ADB’s loan portfolio so that ADB is able to expand its lending over
the next few years. ADB has provided Sida with 15 infrastructure loans to India, Vietnam,
Sri Lanka and the Philippines as the sub-portfolio to be financed. These are mainly in
energy and provided on ADB standard conditions over 25 years. A Sida guarantee
corresponding to US$ 200 million is being discussed. Sida’s interest in providing the
guarantee are twofold: to increase its cooperation with ADB and to have an instrument for
influencing ADB’s work in terms of Swedish development values such as democracy,
human rights, equality and so on.
Results
The guaranteed Concessionary Credit scheme in operation in the 1980s and 1990s
benefited from a sound technical design and experienced staff across EKN, the Swedish
Export Credit Corporation (SEK), the banks and the supplying companies and BITS/Sida.
The recipient side mainly consisted of public utility companies and large complex
contracts. Only in cases where clients were inexperienced in purchasing equipment under
supply contracts would complications arise.
In the government commissioned report SOU 2006:17 seven ex-post evaluations were
presented, which i.a. covered nine water and sewerage projects in China and a high voltage
transmission line between South Africa and Namibia. The general conclusions from the
13
evaluations were positive. They suggested that the projects performed better in terms of
capacity building and sustainability than had been the case in traditional grant-funded aid
projects. Key success factors included competent partners and the fact that aid modality
was reactive rather than proactive, responding to stakeholders’ own initiatives and
providing necessary flexibility.
Of Sida’s independent guarantees, the one related to the roll-out of a mobile telephone
system in Uganda has been particularly successful. The loan provided by a commercial
bank was repaid prematurely and the guarantee thus expired. A second guarantee for the
Maputo harbor project with a BOT solution related to the Skanska contract was more
complicated and had initial problems. In part, this was due to an overestimation of the
demand for harbor capacity. Since then, and as the Mozambican economy has picked up,
the problems have largely been overcome. There are no results to be reported on the
independent guarantees from 2009 onwards. The system is still new and the projects are
still under implementation.
Learning
A key lesson is that the long period of building up a guarantee portfolio within a system
with in-built checks and balances and where the aid administration works with very
competent partners has provided a very good training ground for the more complex
guarantee challenges which lie ahead. It has also resulted in a substantial guarantee reserve
that can backstop any major losses, should they occur. It therefore also acts as cushion
against any reputational risk which is inherent in an independent guarantee system.
Risks
All guarantees are associated with the transference and assumption of risks. At a portfolio
level, the risks include sector, country or volume concentration risks and those risks based
on co-variance of smaller transactions linked to specific background factors which in
aggregate create a substantial risk. Sida has never had a risk policy limiting its exposure in
terms of size, geography, sector or individual clients. The lack of a risk management policy
is potentially a high risk factor that should be reviewed.
From a broader perspective, Sida’s activities are only one out of several components of
risks taken by the Swedish government. The overall monitoring of the government risks is
the responsibility of the National Debt Office. It interprets the budget law, makes yearly
risk assessments and provides guidelines to various government agencies, including Sida.
The Swedish Export Credits Guarantee Board is the specialized government agency on
risks connected with cross-border commercial transactions, be they investments or exports
of goods and services. Sida collaborates closely with both the National Debt Office and
EKN and draws on their expertise. This had been relatively uncomplicated when the
transactions were not substantially different from regular export transactions guaranteed by
EKN. EKN advised Sida on creditworthiness of recipient countries, as well as on political
and commercial risks involved in specific transactions. An important element in EKN´s
advice was the level of risk-based premium, which should be set on the specific
transaction. However, with the independent guarantee system as the basis for most
innovation in the last few years the expertise of EKN is not sufficient or adequate. The
risks have more in common with those that private sector insurance companies (including
reinsurers), pension funds, institutional investors and large banks have to assess and to
price. Sida actively seeks advice from this broader market, and makes an effort to set
premiums close to market-rate. Sida has got a government mandate to subsidize the
premium.
14
The importance of setting aside funds that adequately reflect actual risks is repeatedly
emphasized in relevant government regulations. The potential weakness of the Sida system
is that it is not based on an established risk policy and risk model informing the premium.
The risk policy and risk pricing have become opportunistic. The National Debt Office has
recently expressed words of caution on risks connected with innovative guarantees and has
stressed the need for close risk monitoring.14
Challenges and scope for scaling up
Sida has a guarantee frame of SEK 10 billion established by government. Approximately
SEK 2.3 billion of guarantees were issued and outstanding at the end of 2013 of which 42
% was for freestanding guarantees. The guarantee reserve accumulated over 30 years of
operations without substantial losses was SEK 1.8 billion of which 92 % was accumulated
from the old system of concessionary credits.15 There is thus substantial headroom both in
terms of possibilities to extend new guarantees and to assume additional risks.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging
other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the
better
Catalytic - that Sida’s engagement triggers other
actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways
of funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante
define desired results, and ex-post determine to
what degree such results were achieved
Recycling of capital
3.2
There is a strong leverage effect by Sida’s guarantee
instrument
Sida’s uniqueness in the granting of guarantees has
resulted in new actors starting to engage with Sida
Sida is in the forefront internationally in structuring of
independent guarantees in a flexible manner
Considerable, first with respect to the guarantee limit,
and second if this limit is extended
The projects in which guarantees are applied tend to be
specific in expected outcome, hence measurable both
ex-ante and ex-post
Well applied, the capital underwriting the guarantees is
not used, hence the recycling is potentially very large.
Important to ensure adequate capital base and premium
reflecting real risk
DEVELOPMENT LOANS
Background
Sida (and sister organisations) have had different loan facilities in the past, including



Development credits 1965 – 1977 (an untied system) ended after an UNCTAD resolution
Concessionary credits 1981 – 2009 (tied system) ended due to its tying status
Conditional loans 1995 – 2007 (untied credits provided on an ‘if and when’ basis)
Assistance credits 1993 – 2005 (untied soft credits) ended due to lack of integration into Sida´s country planning proc Award winner in
Financial Times/ IFC Awards in innovativ financing for development 2014
“New financial mechanisms can cause new risks in the aid program provided by the government. The National Debt
Office would stress the importance of ex ante identification and analysis of those economic risks and costs which
innovative financial mechanisms imply. Guarantees and insurance solutions are linked to future costs, the size of which it
is difficult to assess. It is therefore also essential in connection with new instruments to take into account the need for
adequate procedures related to risk management and financial control”, comments by the Swedish National Debt Office
on the proposed Development Assistance Platform (our translation).
14
15
Sida´s Annual Report 2013
15

ess
While the revised Loans and Guarantees (L&G) Ordinance 2009 provided for
Development loans the system had not taken off as the demand was that much higher for
the new independent guarantee instrument. This product could be combined with loans
provided by multilateral lenders, international and local commercial banks etc., which
made the instrument very flexible in its application.
The revised loan scheme
A recent review of the L&G Ordinance after five years of experience, commissioned by
Sida, proposed revisions to the Development Loan regulations. A new aspect of the
proposal is that Sida would be the lender on record. In the proposed new model, the
interest rate would be market-based taking the actual loan loss risks into account. However,
on a case-by-case basis, Sida may subsidize the interest rate through a grant provided that
it has no market distortion effects. Alternatively Sida may provide a subsidy to the loan
principal e.g. by writing off part of the loan. The maximum grant element is set at 80 %
and the loans could therefore be made highly concessional. The loans could be provided in
local currencies which may increase their attractiveness.16
As regards to the conditional loans listed above, a government commission in 2006
reviewed the system. The system had been used for various purposes, including providing
equity through the PIDG Trust to Emerging Africa Infrastructure Fund (EIAF) and
GuarantCo, refinancing investments by Swedfund, e.g. First Adili Bank in Tanzania and
AMSCO (an African management company) and funding national foundations, e.g. Prodel
in Nicaragua. Conclusions by the commission included:



There was a high level of write offs of the loans
It was likely that the loans had had market distortion effects
The loans may have contravened the Capital Supply Ordinance prohibition of
providing equity-type financing (in the cases of GuarantCo and Prodel a
parliamentary approval of the investment by Sida had to be sought). The
commission proposed that a general government exemption from the ordinance
should be sought by Sida
There might be useful to look into the possibilities to provide conditional loans in a partly
new format as noted in section 3.1 above (on EcoEnergy). It should in this connection be
noted that the proposed new text of the L&G Ordinance does not explicitly prevent the
extension of conditional loans provided that the market distortion effects would be avoided
and the amount of subsidy required under a realistic risk scenario would be set aside ex
ante into a security fund. An exemption from the Capital Supply Ordinance will however
be required to make a revived conditional loan system fully operational.17 18
Possible uses of the revised development loan instrument may be participation in loan
syndications or other types of structured finance on both international and national capital
16
Setterwalls, draft new Ordinance for Development Loans and Guarantees dated 20 March 2014
A follow-up study is currently being commissioned by Sida to review this and other legal implications of this and
related proposals
18 It is worth noting that Swedfund provides conditional loans under the Swedpartnership program. A separate ordinance
has been issued which for this program makes Swedfund a government agency with all its consequences including
open access to documents. See government bill 2008/09:22 .
17
16
markets. It could thus become a useful credit enhancement instrument. Another possible
use lies in a possible cooperation with Swedfund as illustrated below.
Results and lessons learned
The results and the lessons learned from the concessionary credit scheme are presented
above. No ongoing development loan scheme exists from which results or lessons could be
presented.
3.3
PRIVATE-PUBLIC DEVELOPMENT PARTNERSHIPS
Background and design
The PPDP program, initiated in 2011, taps into Sida’s collaboration with large companies,
Swedish as well as non-Swedish. The program covers initiatives in which private and
public actors share a common interest in creating opportunities and achieving development
goals. Sida funding is complementary and Sida involvement is meant to be additional to a
business venture, with clear benefits for the poor. In PPDP a private company and Sida
jointly finance a project that is implemented by a third non-profit party. The PPDPs can be
in any sector, and the third, implementing partly organisation can for example, be a NGO
or a UN organisation. The program is re-active, i.e. companies are invited to propose a
joint project based on guidelines posted on Sida’s home page. While Sida finances a
maximum of 50% of the cost, there is no restriction on the amount. EU’s de minimis rule
does not apply as PPDP is not a company subsidy, but a joint financing of a social or
public good which is not exclusive for the applying company in order to avoid market
distortions.
Innovative features
There are several reasons why Private Public Partnerships (PPP) can be considered
innovative financing. First, PPPs constitute a means of leveraging ODA funds, as the
company will have to provide matching funding of at least 50%. Second, it is a new form
of partnership as commercial enterprises are engaged in developmental activities outside
their core businesses, activities that generally should be carried out by government, but are
not due to shortages of funds, poor performance, or neglect. Third, it mobilizes the
managerial and technical capacity of multinational businesses for developmental causes.
The leverage effects of PPDP are nominally not significant, often based on a 1:1 matching
basis. However, if the PPDPs contribute to changes in company behaviour, the systemic
effects can be significant.
Sida in an international context
A public-private partnership is a well-established funding model, especially in
infrastructure in the industrialized world. In the context of development assistance, the
United Kingdom (DFID) began with PPPs in the 1990s, and the Netherlands (DGIS)
introduced PPPs in the early 2000s and had by 2012 invested about € 0,8 billion.19
Germany has initiated over 3,300 PPPs between 1999 and 2009, totalling € 1,4 billion.
USAID, which began PPPs under its Global Development Alliance, has participated in
19
The Netherlands has established a Partnerships Resource Centre with the purpose of advancing knowledge on PPPs,
lessons learned used to improve on the programme. The Center has a web page providing information on lessons
learned in PPPs, results of evaluations and so on. www.partnershipsresourcecene.org
17
1,600 PPPs with more than 3,000 different partners between 2001 and 2012. Sida is thus a
latecomer in PPPs in the sense the concept is used here. While far from a pioneer in PPPs
in the donor community, certain features of Sida’s PPDP are worth highlighting. First,
Sida’s PPDP program is designed to be untied aid. There is no restriction for companies
anywhere in the world to approach Sida for collaboration under the PPDP. (PPPs
elsewhere tend to be de facto tied aid and to some extent hidden export promotion. The
German PPPs have particularly been accused of this.20) Second, the third party element in
PPDP is not the common feature of similar programs.
Sida’s portfolio
Sida has currently eight projects in its PPDP portfolio, and a dozen such projects are in the
pipeline. Among the private partners are Swedish multinational companies such as Abba,
H&M, Scania, Tetra Laval and Volvo Construction, but also non-Swedish companies such
as Caterpillar, Green Resources and Lavazza. The projects include a variety of themes and
subject matters such as vocational training; sustainable tuna fisheries; environmental
protection, safety and health in textile industries; dairy for school milk; and climate change
adaption and training for coffee farmers. Some examples of Sida’s PPDPs follow:

Vocational training Iraq – the Swedish Transport Academy jointly with Scania and UNIDO as
implementing organisation. The purpose of the project is to improve the standard of vocational
training in maintenance of heavy-duty equipment in order to reduce costs due to the breakdown of such equipment, improve the quality of vocational training schools in this sector and
to create jobs for youth. The Scania project was one of the first efforts under the PPDP
program. It came about as a result of a Swedfund investment in a Scania subsidiary in Iraq, and
the notion that the quality of maintenance personnel in Iraq was sub-standard for heavy-duty
equipment.

School milk distribution program in Zambia in cooperation with Tetra Laval. This PPP
provides 15.000 schoolchildren in Eastern Zambia with school milk twice a week. The program
also includes support to some 200 small-scale farmers who provide the milk. Other key
partners are the Ministries of Education &Health as well as local companies and NGO’s. The
dual purposes are testing a model of a school milk program in order to improve child nutrition
and to stimulate the smallholder diary sector.

Coffee Climate Initiative assists coffee farmers in adapting to the effects of climate change by
combining climate science with proven farming methods with the ultimate objective of
improving the livelihoods for smallholder coffee farmers. The project is implemented in
Tanzania, Guatemala and Vietnam and aims at providing coffee farmers with the access to
adequate knowledge and instruments. This will enable them to apply and finance effective
climate change mitigation strategies to tackle some of the problems faced by small farmers.
The Coffee and Climate Initiative is a partnership between the Group of Leading European
Coffee Industry Partners. The Coffee and Climate initiative total project cost is an estimated
1.65 million Euros (14 million SEK), of which Sida provides about 4 million SEK. The
initiative is also supported by the German Agency for International Cooperation (GIZ).
Results
The Sida PPDP program is too young to provide any robust evidence on development
results related to the overriding objectives of Sida. In Swedish development assistance, the
20
As indicated in the Sida portfolio, there is so far a dominance of Swedish companies. This is mainly due to the fact that
Sida initially launched the program in Sweden and so far has not engaged in any significant promotion outside
Sweden.
18
PPDP program has been breaking ground in engaging the (Swedish) business community
in development assistance, improving the dialogue between Sida and business, contributing
to Sida’s learning of what business can do and not do.
Learning
It is a common experience among donors that PPPs are cumbersome in design and
management. The initial Sida PPDP took long time to set up partly due to inexperience by
the companies in working with Sida and vice versa, requiring prolonged procedures trying
the patience on both parties. The third partly element of the PPDP adds complexity in
identifying such a party and bringing it along in the design. A further complicating factor
was that the initial PPDPs were designed by Sida in Stockholm, but required the
engagement by the Swedish embassies in the targeted countries. When the embassies of
one reason or the other, were unhappy with the concept, considerable time had been spent
in vain by Sida and the companies.
Risks
Sida’s engagement is in the form of a grant; hence the financial commitment is well-known
with no future obligations. There is, potentially, a significant reputation risk involved in
PPDP in the sense that Sida might be seen as co-opted into controversial issues in
multinational companies’ corporate social responsibilities, for example in workers’ rights
or land-related issues. For example, a far gone preparation process of a PPDP with a Swiss
company engaged in a large-scale bioenergy investment in Sierra Leone was eventually
cancelled by Sida, likely due to considerable critique of the investment for land-grabbing
by the civil society. (Sida’s engagement would have been vocational training and possibly
upgrading of social amenities in local villages). Market-distortions and favoring Swedish
multinationals are other risks associated with PPDPs.
Challenges and opportunities for scaling up
The PPP model lends itself for development efforts in basically any of the thematic fields
of the Swedish development assistance, but this would require a more pro-active role by
Sida than is the case today. It would also require a stronger effort of seeking partnerships
with other companies than Swedish (which know about the program and to some extent
were instrumental for the program to be established). Embassies might apply the PPDP
instrument in country results-strategies by identifying constraints and development issues
within specific themes that might be addressed through PPPs and, based on this, review
potential partners.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging
other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the
better
Catalytic - that Sida’s engagement triggers other
actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways
of funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante
Initial leverage limited, usually 1:1
Strong – opportunities to work directly with a number of
multinational companies in joint ventures and provide
catalytic inputs to CSR
Not pioneering in an international context, but in
Swedish ODA
Replication can be considerable as proven
internationally. Scaling up in individual PPDPs limited,
but as a program considerable
Feasible.
19
define desired results, and ex-post determine to
what degree such results were achieved
Recycling of capital
3.4
None
CHALLENGE FUNDS
Background and design
A challenge fund is a financing mechanism to allocate (donor) funds for specific purposes
using competition among organisations as lead principle. A challenge fund (CF) asks for
proposals from companies, organisations and institutions working in a targeted field.
Challenge funds are set up to meet specific objectives – such as extending financial
services to poor people; finding solutions to a specific health problem in developing
countries; as a means of triggering investment to certain high-risk markets; to stimulate
innovation for effective use of water resources, etc. Challenge funds do not have to be
directed to commercial enterprises, but can also be aimed at other organisations such as
research institutions, civil society organisations, and also public authorities. The scope of
using CF for creative problem-solving in development is wide.
Innovative features
Several factors drive the interest in the donor community for challenge funds:



Competition is seen as a method of accomplishing development through triggering
search for smart and cost-effective solutions.
Challenge funds provide leverage of donor funds by engaging private capital in
matching financing of projects.
Challenge funds are a mechanism of directly working with commercial players
without creating market distortions.
One of the innovative features of challenge funds is that is triggers creativity. The model of
competition for resources is not only a mechanism to select the ‘best’ models, but can
stimulate many initiatives, which did not exist before. Some of these are likely to continue
even if they are not awarded by grants. The leverage effects are thus considerably more
than the ratio of public-private funds in the awarded projects, which normally is 1:1. The
ratio of applications to actual number of awards is a manifestation of this. (Often, only a
few percent of applications are rewarded.) A case in point is several CFs undertaken in
Somalia by USAID and the World Bank with, in relative terms, rather small grants, have
attracted thousands of applications from to a large extent diaspora Somalis.
Sida in an international context
While challenge funds have been used in many contexts, not least to promote innovations
in health in industrialised countries, DFID was a pioneer in the late 1990s in the context of
development assistance. These efforts included CFs for business linkages, financial
deepening, tourism and civil society. Australian aid and Canadian aid followed, and
USAID also became increasingly engaged in large scale challenge funds. A version of CFs
is the so-called ‘Grand Challenge Fund’ which functions as an umbrella and framework for
a number of specific CFs. Sida has used challenge funds since 2011, in some cases with its
own design and management, in other cases in cooperation with other partners. Thus, Sida
was far from a pioneer in applying the challenge fund concept. However, in some
20
applications, such as the Innovation Against Poverty (IAP) Sida took on a pioneering role
in promoting innovations aimed at the ‘Bottom of the Pyramid’.
Sida’s portfolio
Sida’s current portfolio includes five CFs and there are an equal number at a planning
stage. Examples of Sida involvement in CFs are:

Innovations Against Poverty (IAP). The program, launched in 2011, took its inspiration
from the Bottom of the Pyramid concept. It was as a risk-sharing mechanism for business
ventures involved in innovations with potential value to reduce poverty. IAP had two windows
for grants of up to EUR 200,000 and applying companies could be from anywhere as long as
the project took place in developing countries, including the Middle East. The IAP was
managed for Sida by a consortia led by Price Waterhouse. IAP has an initial funding of SEK 51
million of which about half was allocated for the management. IAP closed in 2013 after five
rounds having funded about 70 companies. The results of the IAP in terms of commercially
successful innovation and building start-up companies are too early to decide. A proper
timeframe is probably 10-15 years. The innovative features of IAP were: 1) addressing the
needs at the ‘bottom of the pyramid’; 2) an explicit focus on promoting innovations for the
needs of the poor; 3) providing seed financing at a business stage sometimes called the
pioneering financial gap; 4) an effort to combine intensive learning with the investments, for
example in annual learning conferences and a parallel e-platform for sharing experiences.

The Africa Enterprise Challenge Fund (AECF), which started operations in 2008, provides
grants and conditional loans to businesses that wish to implement innovative, commercially
viable, high impact projects in (sub-Sahara) Africa. The AECF supports businesses working in
agriculture, financial services, renewable energy and technologies for adapting to climate
change. It also supports initiatives in media and information services where they relate to these
sectors. Grants and repayable loans are provided between US$ 250,000 to 1.5 million. The
competition is open to companies globally provided the business idea is implemented in Africa.
AECF was a DFID initiative and is financed by AusAid, Danida, DFID, DGIS and Sida. Total
funding is US$ 200 million. Sida has contributed about SEK 217 million. The fund is a special
partnership between Alliance for a Green Revolution in Africa (AGRA) and the donors. AECF
has appointed KPMG as fund manager. Sida is the sole financing agent of one of AECF’s
windows, for post-conflict countries, with Sida contributing funding of US$ 20 million. This
window, operating 2012-2017, has currently disbursed funds to a dozen grantees. AECF has
considerable momentum and has attracted different donors.

Making All Voices Count (MAVC) is a part of USAID’s Grand Challenge for Development. It
is set up to support innovative ideas that improve citizens’ engagement with governments,
which in turn could lead to less corruption and more effective government response. MAVC is
funded by USAID, DFID, Sida and the Omidyar Network. Funding totals US$ 45 million of
which Sida contributes US$ 15 million. Making All Voices Count seeks to bridge the existing
gap between governments and citizens through making funds available in four windows that
exploit mobile and other technologies in support of citizen engagement: The first window
provides small grants and prizes as well as technical assistance to innovative ideas that
facilitate government response to citizens’ feedback. The second window provides research
grants to build up an evidence base around available applications. The third window will
support the scaling up of successful initiatives. The global fund also seeks to catalyse global
action and participation by building a global community of people working to identify
solutions to increase and improve citizen and government engagement. The Fund Manager is a
consortium led by the Dutch organisation Hivos. It will operate from 2013-2017.

The Challenge in Bosnia Herzegovina (BiH). The purpose of the fund is to support the private
sector by providing grants to project proposals that deliver both commercial benefits to the
21
private sector and developmental benefits to the population in BiH. The fund awards grants to
provide partial funding of up to 50% of accepted proposal budgets (with a maximum grant size
of EUR 30 000), to registered Bosnian and Swedish micro and small enterprises operating, or
setting out to operate, in BiH. Its purpose is to mobilise diaspora Bosnians, especially in
Sweden, to invest in BiH in start-ups, micro and small enterprises without sector restrictions.
The Fund is small, in total of SEK 4,5 million over three years. A first call for proposals was
made in 2013, attracting some 600 applications. The outcome of the Challenge is too early to
assess. The innovative features of the Challenge is that it is a first effort of mobilising the
(Swedish) Bosnian diaspora to invest in their original home country and use skills and business
ideas from outside; and 2) it has a low cost administrative set up with management in-house in
the Swedish embassy in Sarajevo.

Innovation for Peace is a Columbian challenge fund promoting and mobilizing private sector
contributions to peace-building. The objective is to result in more companies being committed
and actively participating in the development of peace-building initiatives as part of their core
business. The first call took place in 2013. Sida’s contribution is about SEK 10 million and the
CF is implemented jointly with GIZ.
Results
Sida’s engagement in challenge funds is young, and evidence of results in terms of
outcome and impact are too early to be available. In a majority of the CFs, disbursement is
still on-going to the winning companies. In the case of IAP, which is now closed after three
years of piloting, the results in terms of successful innovations for the base of the pyramid
will likely take close to ten years to emerge.
Learning
CFs can be tailored for almost any purpose and it is thus a versatile instrument. It is not just
an instrument for private (business) sector participation. Hence, CFs can be applied for
most of Sida’s priority themes, and be tailored to Sida’s results-strategies at country level.
CFs are demanding from an administrative point of view both in design and in
implementation. Even when CF management is outsourced, as in the case of IAP, the
demand on Sida administration during implementation was so demanding that Sida
eventually pulled out. For these reasons Sida prefers to be co-funder and avoid taking
management responsibility in multi-donor CFs. However, such funds are generally less
focused on Sida’s objectives, hence fit less well in a result-strategy context. CFs are an
innovative form of financing, but are also a model well suited to promote innovation. In
fact, the first CFs in history were set up to stimulate research in health towards specific
needs). In the case of Sida, several of the CFs on-going or in the pipeline are specifically
focused on stimulate innovation. An example is a planned Sida CF for the nexus in
between food security, water and energy.
Risks
Sida provides grants to CFs, hence there are no financial risks (as in guarantees involved).
The risks are whether the CFs will provide intended results over time, and if these results
are additional to what the market anyway would deliver. There is also a certain reputation
risk for Sida. For example, in the AECF Sida is funding up to SEK 10 million to individual
enterprises in Somalia for which due diligence could not always be done well due to the
security situation. Risks related to money laundering and financing terrorism and piracy are
considerable.
22
Challenges and opportunities for scaling up
As CFs can be tailored for almost any purpose, CFs can be applied for most of Sida’s
priority themes, and be customized to Sida’s results-strategies at country level. The
Swedish Government urges Sida to increase its use of CFs. One means of expanding Sida’s
own engagement might be setting up a Sida ‘grand CF’ as an umbrella for CFs, for
example undertaken at embassy level. This grand CF could provide generic systems to be
adapted for specific CFs (such as ways of form applications, procedures for granting
awards, communication models, formats for on-line applications, systems for monitoring
and so on.) The Grand CF could be outsourced to an implementing organisation, which
would also act as a helpdesk.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging other
forms of funding in the sense of adding to ODA, the
higher the degree of leverage, the better
Catalytic - that Sida’s engagement triggers other
actors or use of funding in different contexts
Pioneering – that Sida is involved in new ways of
funding and financing mechanisms
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante define
desired results, and ex-post determine to what degree
such results were achieved
Recycling of capital
3.5
Initial leverage limited, usually 1:1 Indirect
leverage can be substantial
Strong – opportunities to engage with a very large
number of companies and other institutions
Not pioneering in an international context, but in
Swedish ODA
Replication can be considerable as proven
internationally. Some donors now implementing
CFs with budgets in the order of SEK 1-2 billion
Feasible.
None
OUTPUT-BASED AID
Background and design
Output-based aid is considered a form of results based financing. RBF is typically defined
as an approach to link the delivery of infrastructure and social services (the intended result
and identified market failure) to performance-based incentives, such as rewards or
subsidies. The incentive payments can be from public or private sources. In terms of
approach, an RBF design approach focuses on determining what the desired results are and
what incentives are needed to achieve the desired performance. By starting with the
result—more children immunized, for example—and letting health workers and managers
on the ground decide how to achieve them, fostering innovation to achieve results. RBF
includes other forms such as output-based disbursement, conditional cash transfers, carbon
finance and AMCs. These approaches use incentives to target demand and supply side
failures. Output-Based Aid and AMCs are examples of a supply side incentive as the focus
is on the service providers. Demand side incentives include rewarding beneficiaries for
consuming services such as visiting clinics for regular vaccinations or attending school.
Innovative features
OBA is an approach designed to increase access to and the delivery of basic services to the
poor using performance-based subsidies. OBA links the payment of aid to the delivery of
specific services or “outputs”. The service delivery is contracted out to a third party, the
service provider who is responsible for providing the up-front financing of the contracted
23
services until the agreed upon outputs are delivered and independently verified. The
subsidy is explicitly targeted at the poor, depending on the context and the environment.
GPOBA seeks to be innovative by testing the OBA approach in new sectors and in fragile
states. In addition, innovative features are found at the project level and derived through
the competitive process. Potential service provides are often selected by the number of
people they can serve based on a fixed subsidy amount and permitted to innovate as long
as they meet the agreed outputs.
Sida in an international context
The Global Partnership on Output-Based Aid (GPOBA) is a multi-donor trust fund created
in 2003 by DIFD and the World Bank to design and implement OBA pilot projects. The
fund is administered by the World Bank. Since inception, the program’s donors have
provided a total of $323 million in funding contributions and pledges. The core operating
principles of the GPOBA approach are targeting of subsidies, accountability, innovation
and efficiency, use of incentives to target the poor, output verification and monitoring, and
sustainability.
Sida joined GPOBA in 2003 when the program was launched. In 2013, GPOBA received
additional funding of US$26.8 million from Sida. Sida and the other development partners
have received training from GPOBA in order to develop their own OBA projects and to
mainstream the approach, to various degrees of success. AusAid, for example, has scaled
up a water project working directly with the Government of Indonesia.
Sida’s portfolio
Sida does not have any OBA projects of its own design, but funds various projects that
GPOBA staff designs, implements and monitors. Below are some examples of projects
funded by Sida under GPOBA:

A renewable energy program in Bangladesh to bring solar power to rural households that is one
of the most successful in the world reaching hundreds of thousands of households. The
program demonstrated an inexpensive and reliable way to bring electricity services to the
poorer households. The program is combined with longer-term consumer credit offered by
local financial institutions and service providers.

A solid waste management program in Nepal that improves services in five poor municipalities
which is expected to reach 800,000 people over the four-year period. The performance based
transitional subsidies are paid on improved waste collection and cleanliness as well as
improved user fee collection, covering the gap between the cost of services and revenue
collection. To encourage innovation, the municipalities are given the flexibility to design their
own model as payment is based on output indicators.

A water and sanitation fund to provide water and sanitation services for 30,000 households in
Kenya. This project is being scaled up based on the recently closed community managed water
project implemented by K-Rep Bank (and for which USAID provided a guarantee of 50% of
the loans). This new project supports water service providers to access $16 million from
domestic commercial banks to finance projects in low income areas.
Results
OBA makes its subsidy payment on measureable results defined as outputs. Further, an
OBA scheme should lead to i) lower costs, depending on the efficiency of the service
24
provider, and ii) opportunities and incentives for the service provider to innovate as
provided by the terms of the contract and focusing on the results to be achieved. Examples
of how OBA projects have resulted in efficiency gains, usually using competitive tendering
processes based on lowest subsidy required or greatest numbers of beneficiaries reached.
An example is a Mongolia ICT project: competition resulted in 28% savings in the total
subsidy required for the original areas/beneficiaries to be served. The savings were used to
fund a wireless center, which is estimated to have 1,000 additional beneficiaries.
Learning
OBA approaches have been tested in every region and applied in six sectors, including
energy, water and sanitation, health, solid waste, education, and information and
communication technology.
Risks
Sida provides grants to GPOBA so there is no financial risk or on-going exposure to Sida.
The risks are whether appropriate projects will be identified and well designed so that the
desired outputs are achieved on the agreed terms. The projects themselves contain a
number of risks including that the beneficiaries will take the service (demand risk), that the
unit cost pricing does not change and that the selected service providers will perform.
There is also a potential reputational risk associated with the different contracted
stakeholders but that risk is mitigated through rigorous due diligence and vetting.
Challenges and opportunities for scaling up
Scaling up OBA pilot projects are already being done in a number of countries through
GPOBA or by other development partners. The expansion of a pilot program can take
many forms such as to a different location (i.e. another region of a country), a different
type of area (i.e. from rural to peri-urban) or with new stakeholders such as the addition of
new service providers or new financiers in the event of a credit scheme. A current example
of a pilot project that is being scaled up with Sida support, is a maternal health project in
Uganda, whose goal is to increase access to skilled care to poor women during pregnancy
and delivery, through a voucher scheme. It was a successful OBA pilot project that is
being expanded to enable the Ministry of Health to build capacity to mainstream the use of
voucher schemes in the health sector in order to benefit from additional public funding
from the government and other health development partners. Public clinics are being
included as service providers. Sida is providing US$13.3 million to this project.
OBA differs from traditional development assistance, which tends to be input-based, i.e.
the donors provide funding to a project upfront to finance certain inputs, which then are to
lead to the delivery of certain outputs and hopefully outcomes. The problem is the
measurement of the results, so that it is difficult to gauge the development impact of
development assistance. OBA not only allows for the effective measurement of results, but
also disburses on results.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging
other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the better
Limited to no leverage on pilot projects. Private
companies through their foundations have continued
to provide funding to expand access to their services
to the poor.
Catalytic - that Sida’s engagement triggers other
actors or use of funding in different contexts
Strong – OBA pilots have been replicated in other
contexts
25
Pioneering – that Sida is involved in new ways of
funding and financing mechanisms
OBA structures are changing and being applied to
new sectors such as solid waste.
Replicable and possible to scale up
Feasible and underway in a number of cases
Measurable, i.e. that it is possible to ex-ante define
desired results, and ex-post determine to what
degree such results were achieved
Measurable results is one of the attributes of OBA.
Aid is disbursed based on results.
Recycling of capital
None
3.6
PRIVATE PUBLIC MULTI-DONOR FUNDS
Private-Public Multi-donor Funds is a broad category, which can take many forms. This is
illustrated below in the description of PIDG.
The case of PIDG: Background and Design
The Private Infrastructure Development Group (PIDG) is a multi-donor organisation set up
in 2001 on the initiative of DFID, and today governed by nine international development
assistance agencies, including Sida. PIDG’s mission is to mobilize private sector
investment in infrastructure in countries where investment and experience is limited. It
believes that infrastructure is essential to economic growth and poverty alleviation.
The PIDG members’ funds are invested through a portfolio of facilities to increase flows of
local, regional and international investor capital, lending and expertise. The facilities are
managed by independent fund managers and overseen by independent boards of nonexecutive directors. Activities of PIDG facilities fall into three broad categories:



Facilities that directly provide long-term debt finance in foreign currency (Emerging Africa
Infrastructure Fund (EAIF), ICF-DP21, GAP22) and in local currency through guarantees
(GuarantCo)
Facilities that provide early stage project development capital and expertise in Africa and
Asia (InfraCo Africa and InfraCo Asia)
Facilities that provide technical assistance, viability gap funding to improve affordability
and capacity building support to PIDG projects (Technical Assistance Facility (TAF) and
to public authorities seeking to deliver projects with private sector involvement (DevCo).
In 2012, PIDG members, including Sida defined its approach for the 2013-2016 period
through a Strategic Review. The PIDG members’ three-prong approach to infrastructure
development is:
 Focus on the more challenging infrastructure sectors for private sector participation
 Build increased investment in the early stages of the infrastructure project cycle
 Concentrate on poor and fragile states
Innovative features



21
22
The organisation continues to evolve and develop new facilities to meet the market failures
in the infrastructure market.
Some PIDG facilities have been able to leverage donor funds by using these funds as
equity capital providing a “cushion” for lenders.
PIDG operates as a public-private partnership organisationally.
Infrastructure Crisis Facility – Debt Pool – supported by KfW
Green Africa Power. The innovative GAP program is illustrated in a box below
26



Its facilities make their investments based on Investment Policies defined by the donor
agencies.
Some facilities have been structured to “recycle” or re-use the funds once investments have
been repaid or guarantees expired.
The PIDG members can choose to invest in only those facilities that meet their aid
objectives.
Results
PIDG has developed a track record, particularly with its earliest projects and can report
actual results based on a robust results management framework and team. From 2003 to
2013, PIDG facilities committed approximately US$ 1.6 billion for 225 projects
infrastructure projects in 57 countries. Ninety-nine PIDG supported projects have reached
financial close23 and these projects will provide new or improved access to infrastructure
to nearly 200 million people, of which approximately 35% are female. These projects will
create directly over 97,000 short-term construction jobs and 214,000 permanent jobs.
The PIDG facilities have attracted significant amounts of private capital for infrastructure
development. Thus in 2013 every US$ that PIDG contributed helped to mobilise US$23
from the private sector and generated another US$10 from the DFIs. When fully
constructed, these projects will have attracted additional financing of US$27.9 billion (of
which US$19.4 billion or 69% is purely from private sector commercial resources. Over
72% of PIDG supported projects are located in the poorest countries (DAC I and II).
Cumulatively, over US$702 million have been invested in fragile states, representing 44%
of its total commitments since inception. In general, PIDG is seen in the donor community
as a success story in development.
Sida’s role
Sida has made investments in three of the PIDG facilities; EAIF, GuarantCo and TAF. It
was one of the first donors with the Dutch and Swiss aid agencies when PIDG was formed.
Sida took an active part in setting up the first two investment initiatives, EAIF, which had
the remit to leverage its equity capital by private borrowing and GuarantCo, a local
currency guarantee fund whose mandate included developing local capital markets. EAIF
has become a success both in raising capital and in building up a high quality project
portfolio.
While GuarantCo was based on a Swedish idea that DFID accepted and implemented, Sida
had difficulties in following suit on a timely basis, due to (i) the perceived risk of the
concept and (ii) the challenge of providing equity-like of capital, which ultimately required
a parliamentary decision to make the investment. As with EAIF the Swedish contribution
was made as an interest-free conditional loan to the PIDG Trust, which it converted into
equity. Sida saw GuarantCo as a vehicle to develop local capital markets and open them up
to bond issues, so it provided funds into the PIDG TAF to support this objective. When
GuarantCo was seasoned enough to increase its leverage by taking up counter-guarantees
from the commercial market, GuarantCo and Sida discussed various arrangements so that
Sida could smartly use its guarantee instrument as a lever but no decision was made for
reasons of formalities.
23
PIDG finances most of its projects on a project financed based. Financial close refers to the achievement of having all
funding committed and documentation completed to bring a project to operations.
27
Sida continues to participate in all PIDG half-yearly Governing Council meetings in which
policy issues related to PIDG and its facilities are discussed and decided but with little
active involvement.
Learning
PIDG has become a recognized success, having been able to leverage significant amounts
of private capital and with actual not expected positive development effects in terms of job
creation, women participation, etc. Not only does it continues to innovate through
developing new facilities such as Green Africa Power in 2012 and InfraCo Asia in 2011
but it is following Sida’s priorities in reaching the poorest and working in post-conflict
areas. However, through a Sida lens, PIDG can be seen as a lost opportunity in innovative
financing. It has not followed up on the possibilities of learning from PIDG experiences
nor are they exploring the potential of joint funding with the PIDG facilities.
A lesson may be that initially Sida joined as an active participant in a new and unproven
public-private partnership with unknown risks. It had taken “ownership” in the design of
initiatives. However, the reduced interest and both financial and actual engagement by Sida
over the years seems to have been a combination of (i) loss of a champion in its
organisation; (ii) emerging political sensitivity and contradictions with existing regulations
(the tax haven debate and the Capital Supply Ordinance), (iii) a shift in Swedish aid
priorities away from infrastructure; and (iv) overall project fatigue given the many new
demands on Sida with limited staff resources.24
Risks
The members are not involved in the operations of the facilities. As such, the donors are
not exposed to liability relating to the investments, loans or guarantees. While Sida
provided a conditional loan to the PIDG trust, the funds are used as an equity base for
loans and guarantees. Consequently, the risk is that the facilities have losses that require
payouts from this capital base. PIDG has become a large and complex organisation, hence
governance becomes an increasingly challenging aspect and does have reputational
implications as well.
Challenges and opportunities for scaling up
The opportunities for scaling up the PIDG and the facilities have been demonstrated over
the last few years. The existing facilities have grown by hundreds of millions of dollars.
This is expected to continue.
Summary against criteria
Leveraging - that (Swedish) ODA is leveraging
other forms of funding in the sense of adding to
ODA, the higher the degree of leverage, the
better
Catalytic - that Sida’s engagement triggers
other actors or use of funding in different
contexts
Pioneering – that Sida is involved in new ways
of funding and financing mechanisms
24
Strong - Additional capital has been mobilised for a
number of facilities both at the facility level and at the
level of the projects in which loans, guarantees or
investments are made.
Strong – There has been a strong demonstration effect
from some of the PIDG projects.
PIDG has created new facilities and within its existing
facilities such as GuarantCo it has pioneered new
structures such as a Shariah guarantee in Pakistan.
It is noteworthy however that Swiss SECO and Austrian ADA, both with staff resources with less than 10% of Sida are
actively engaged in PIDG.
28
Replicable and possible to scale up
Measurable, i.e. that it is possible to ex-ante
define desired results, and ex-post determine to
what degree such results were achieved
Recycling of capital
3.7
Feasible and underway
Measurable results – Development indicators have been
confirmed with actual results based on operating projects.
EAIF and GuarantCo raise funds for loans and guarantees
off their capital base. The capital has supported multiple
projects
DIRECT INVESTMENTS
The government instruction 2013 which initiated this review mentions ‘direct investments’
as a potential Sida instrument. It can be argued that Sida as a matter of routine is already
involved in direct investments, for example through their funding of facilities such as
PIDG, challenge funds or by providing finance to various trust funds established by
multilateral organisations. Grants, and earlier conditional loans, have been used for such
direct investments, which sometimes take the form of equity for the funded facilities and
indirectly potentially also supported companies in challenge funds. The interest by donors
making direct investments has its basis in understanding the importance of mobilising the
private sector for development in terms of capital, expertise and improving the
effectiveness of their aid.
If with direct investment, active ownership by Sida is implied, the issue becomes more
complex. The Capital Supply Ordinance currently restricts such ownership by all Swedish
authorities, including Sida. Hence, Sida needs to get an exemption from the Ordinance
from the Parliament either on a case-by-case basis, or permanently to make direct
investments. When Sida funded its investment in GuarantCo, the first approach was used.
Alternatively, Sida must convince the Government and the Parliament of a change of the
Ordinance, or provision of a general exemption for Sida. Sida has, as early as 2006,
considered requesting an exemption but decided not to go ahead with the proposal. Sida is
currently renewing its dialogue with the Government concerning the Ordinance in order to
facilitate the use of equity as a tool for Sida.
Equity investment is typically included in the mandate of DFIs in most donor countries. As
discussed elsewhere, one of the most dynamic developments in innovative finance
internationally takes place through the complementary cooperation between DFIs and
donor agencies. In this context, there is a new trend of donor agencies undertaking direct
investments as equity holders jointly with their DFIs, and/or using the DFIs as fund
managers. The DFID Impact Fund is one such example, in which DFID provides equity
through the British Commonwealth Development Corporation (CDC), for impact
investments focusing on Bottom of the Pyramid investments. The DFID Impact Fund is
further described below. Similarly, the DKK 1.2 billion Danish Climate Investment Fund,
in which Danida and Denmark’s DFI, IFU jointly invest equity with IFU providing the
fund management.
There are also recent examples of donors making direct investments without relying on or
cooperating with their DFIs. Examples include the Africa Guarantee Fund (AGF), which is
briefly described earlier in this report and DFID’s Low Carbon Study Fund with equity
provided by DFID and fund management carried out by Lion’s Head, a fund management
company. In AGF Denmark and Spain are providing equity capital and DFID is likely to
join. The objective of many of these investment funds is to mobilise private equity to the
funds through a blend of private and public capital, often with differentiated shares. The
donor equity will generally accept a lower return and higher risk to promote the
development aspects of the funds. This is the structure of AFG, for example.
29
If Sida should engage in direct investments in funds as those described above, a number of
issues must be considered:







Sida needs a permanent exemption from the Capital Supply Ordinance as described
above.
Treatment of the return of the equity capital and possible dividends at exit. Danida,
for example, is considering setting up a fund under the government for this reason,
but decision has not yet been taken.
The structure and balance of risk allocation and sharing when private equity is
involved so that the donors do not take all the risks and the private sector all the
profits.
Fund management. The most feasible solution is delegating the responsibility
through outsourcing to a DFI or a professional fund manager. Care should be
given, however, to structuring the relationship to minimise conflicts of interests.
Sida management capacity. Equity investments involve different skills in
structuring and monitoring the investment and in ownership even if fund
management is outsourced.
Treatment of negative aid flows. Recovered equity and dividends is subtracted from
the aid disbursement in the current OECD/DAC recording. (The accounting system
is under review to allow for new forms of development assistance, including
guarantees and investments).
The relationship with Swedfund. Sida’s engagement in equity will have an impact
on Swedfund. This might be seen as an opportunity for Swedfund, which appears to
be the case in Denmark and the UK with respect to IFU and CDC. The potential
risk of further marginalization of Swedfund in the Swedish development assistance
architecture should be taken into account.
In summary, innovative financing is increasingly engaging traditional donor agencies in
equity investments in various types of funds. Sida has expressed an interest to add this tool
to its financial instruments, not least to be able to engage with other like-minded donors
such as Denmark, the Netherlands and the UK. We suggest the modalities for such
engagement to be subject for a further study under the Phase 2.
3.8
DEVELOPMENT IMPACT BONDS
Development Impact Bonds (DIBs) bring together private investors, non-profit and private
sector service delivery organisations, governments and donors to deliver results that
society values. They provide upfront funding for development programs by private
investors, who are remunerated by donors or host-country governments—and earn a
return—if evidence shows that programs achieve pre-agreed outcomes. If interventions
fail, investors lose some or all of their investment. DIBs not only attract new sources of
funding for development programs but offer a new business model that encourages
innovation and flexibility for better results. Because investors assume the risk of financing
programs, they have the incentives to put in place feedback loops and data-collection
systems that make programs more responsive to the needs of beneficiaries and more likely
to succeed.
A DIB Working Group explored the challenges and benefits of this new funding model for
development and contexts in which it could be applied. The Swedish government through
the Ministry of Foreign Affairs is represented in the group, led by the UK based Centre for
Global Development. For more details, see www.cgdev.org
30
3.9
SIDA CASES
As requested in the ToR, we selected three Sida projects from its portfolio and developed
case studies basing our selection on Sida’s definition of innovative financing and the
parameters suggested. Recognizing the versatility of Sida’s guarantee instrument in an
international context, we selected three examples of guarantees. The case studies focus on
the purpose of the contribution, financial design, progress, results and lessons learned. The
selected cases studies are:



The Global Health Investment Fund
The Pledge Guarantee for Health
The African Risk Capacity
These facilities are described briefly below. They are further elaborated in Annex 2.
31
3.9.1
Global Health Investment Fund (GHIF)
Issues addressed



Only 10 % of the research on global health is devoted to tropical diseases while tropical
diseases are 90 % of the burden in terms of population affected in the poor countries.
Pharmaceutical companies are disinclined to invest in R&D in products where the potential
commercial return is limited as the purchasing power of the potential clients is extremely low.
No one government has the incentive to provide funds for the high development costs.
Structure:
GHIF is structured a not-for-profit trust set up as a private for-profit charity fund. 60% of the
investable funds are guaranteed against loss. The Gates Foundation is the lead guarantor of GHIF.
Sida is providing a co-guarantee, channeling its ten-year partial risk guarantee through the Gates
Foundation. Lion’s Head is the Investment Manager.
Guarantee/Risk structure
Investment structure
Project structure
Private investors
Private sector risk
Medicine companies
Available
Available for
for new
new
commitments
commitment
Pension Fund
Risk
Sida
BMGF
Charitable funds
Funds
Government funds
IFC
,
,
Sida
BMGF
Individual investors
Project commitment to
three companies
KfW
Innovative features
 A unique combination of aid, private capital and philanthropy working for a shared objective
 Unleashing an affordable value chain to benefit the poor
 A substantial leverage of the Sida guarantee amount of US$ 21,8m has crowded in US$108,9m
of investment funds
 Substantial scaling up possibilities in a second phase (with less aid funding)
 Potential to be replicated outside the health sector (e.g. education)
32
3.9.2
Pledge Guarantee for Health (PGH)
Issue addressed:

Timing delays (and uncertainty thereof) between the financial pledges of the donor agencies
and the disbursement of these pledges. The goal is to increase the financial efficiency of these
payments. For example, if the bed nets are not provided in time for a rainy season or medicine
to avoid stock outs, the health of the targeted population is impacted.
 Reducing logistic costs (reduction of air freight, for example) due to the timely delivery of the
goods so that funds that would more efficiently used.
 Improving pricing of goods and services: The uncertainty of the timing of payments causes
suppliers to increase prices to hedge against potential payment problems, production schedule
uncertainty and inventory management. The magnitude of this problem is significant: A
Brookings Institution study in 2008 indicated that up to 28 cents of each donor dollar is lost
due to the volatility of aid.
.
Structure:
A health ministry would approach PGH with documentation confirming a donor pledge of funds.
PGH would issue a payment guarantee to a commercial bank operating in the country against
which the procurement agency may get a working capital loan and open a letter of credit in favour
of the supplier. Once the aid pledge can be disbursed, the donor pays to the bank.
Innovative features
 Addresses the timing and volatility pledging and disbursing aid flows between donors and
recipient countries by offering a solution to improve the financial efficiency of funds flows.
 Uses commercial lenders to assume the risks of donor pledges
 Substantial leverage of the US$ 50 million Sida/USAID guarantee – expected to generate US$
1 billion of lending capacity (and transactions) over a five-years
 Potential efficiency gains to be made by bundling transactions and making bulk purchases
 A new type of partnership among donors: donors taking risks on other donors´ pledges
 Guarantee creates a “soft power” to incentivize donors to disburse funds quickly and the
recipient countries to do what they have agreed to do.
 Potential for scaling up and replicating the scheme; (e.g. other sectors, reduced guarantee
coverage, greater pledge amounts)
33
3.9.3
African Risk Capacity Initiative (ARC)
Issues addressed:



More rapid mitigation of the effects of serious droughts in African countries to reduce the loss
of lives and livelihood for poor people.
Objective: To create a stand-alone pan-African risk pool through which the countries can
insure themselves against the impact of weather events. An affected country will get more
immediate payments to assist in alleviating the consequences of a calamity.
Weather-based system using information covering a 30-year period integrated into the Africa
Risk View software developed by ARC.
Structure: ARC Ltd as a sovereign-level mutual insurance company, governed by the ARC
Agency, where all member states have a seat. A Board of Directors carries out the governance of
ARC Ltd. Sida is being requested to participate as a guarantor with the reinsurers.
Innovative features:
 Establishment of a pan-African mutual insurance system against drought. There is only one
model with similar features, the Caribbean Catastrophe Risk Insurance Facility (CCRIF)
 The assumption of risk by African countries assume responsibility for disasters in neighboring
countries would be a new feature
 A drought insurance instrument owned by affected countries to complement humanitarian
assistance provided by international channels (including Sida)
 The early nature of the ARC interventions would prevent unsustainable use and depletion of
natural resources which follow in the wake of natural disasters and the reallocation of resources
needed for development to short term use
 Objective to crowd in international reinsurers to take substantial risks on an uncertain market at
an affordable price
34
4 INNOVATIVE FINANCE INTERNATIONALLY
The international scene in innovative finance is diverse and dynamic in the sense of
development of a variety of new instruments. This review has neither had the purpose of
undertaking a comprehensive review of the international experience, nor the time to do so.
It is limited to identify some trends and provide some examples of projects and programs
that might be of particular interest to Sida as models.
In our brief review of the international scene, we selected four cases of international
examples of innovative financing of a kind which Sida is not engaged in so far, and could
be interesting models. Overall, in selecting the cases, we looked for mechanisms that (i)
have a potential for replication, (ii) represent different instruments or combinations of
instruments to illustrate the range of possibilities, and (iii) are innovative in the sense that
they are first of their kind in their sector or specific use of instrument. We also made an
effort to include sectors where Sida’s use of innovative finance has been limited to date,
specifically agriculture /SME and energy. The four cases are:




African Agricultural Capital Fund (AACF)
The DFID Impact Fund
The Global Energy Transfer Feed-in Tariff (GET FiT)
Green Africa Power.
The first two are presented below. The last two are included in Annex 3. That annex also
provides:



Some cases of well-known innovative financing mechanisms often discussed in the
discourse of the subject.
Green bonds as a specific innovative mechanism
The application of innovative finance in three dynamic development finance
institutions.
One of our recommendations is that Sida should undertake a more in-debt study in the
application and learning in innovative financing by various agencies, donors, DFIs as well
as private agents such as philanthropic funds and also impact investors.
35
African Agricultural Capital Fund (AACF)
Issue addressed: Lack of banks willing to lend to agriculture, and in particular small-scale
agriculture
Structure: AACF invests in small- and medium-sized agricultural enterprises to improve the
livelihoods of smallholder farmers in East Africa by providing debt, quasi-equity, and equity along
with technical assistance. Pearl Capital Partners manages the AACF. The structure is illustrated
below.



J.P. Morgan invested US$ 8 million in commercial capital as senior unsecured debt at a
below-market rate.
USAID provided a 50 percent guarantee at its standard fee for J.P. Morgan’s investment.
USAID also contributed a US$ 1.5 million grant to fund a TA facility that will support
AACF’s investees, and may be able to extend additional capital to the facility if needed.
The Gates Foundation (with US$ 10 million), the Gatsby Foundation (with US$ 5 million),
and the Rockefeller Foundation (with US$ 2 million) provided equity capital on a paripassu basis
The AACF structure
Innovative features:
The AACF is innovative both in combining public and private funds and instruments, and in
leveraging commercial capital for impact investments.
 The four investors and the fund manager established portfolio-level social impact targets using
Impact Reporting and Investment Standards (IRIS) to manage towards benefiting smallholder
farmers
 To mitigate potential risks, the five collaborators increased the fund manager’s resources and
helped ensure access to business support for AACF’s investees via the technical assistance
36
The DFID Impact Fund
Issue addressed: Lack of patient capital for small scale market opportunities with high poverty
reduction impact, often targeting bottom of pyramid beneficiaries
Structure: The CDC manages the DFID impact fund on behalf of DFID. The impact fund is a fund
of funds with a clear strategy to invest in businesses that achieve positive impact on the BOP
(Bottom of the pyramid) population in their target geographies as consumers, producers or workers.
The fund will make investments of up to £75 million over 13 years. The DFID Impact fund invites
proposals from impact investment vehicles (Fund Managers, holding companies and any other
investment vehicles)
In the longer term, DFID aims to increase investments in bottom-of-pyramid business by
demonstrating financial returns are possible. In the short term, the fund will catalyse increased
capital through giving confidence to co-investors via robust due diligence and through offering
limited potential subordination to private investors.



Funds are invested based on proposals from fund managers
In principle, the fund will be co-investing with others
For the first 6 years of the programme, technical assistance (TA) funding will be made
available to intermediaries receiving Fund capital to use to support the development of the
enterprises they invest in. Each intermediary can apply for an amount of TA funding
equivalent to up to 10% of the amount of Fund capital it receives
Patient capital for bottom of pyramid investments
Innovative features:
The CDC impact fund demonstrates the benefits of merging patient capital without return
requirements with financial expertise in development finance institutions (DFIs).
 Leveraging the expertise if CDC to channel funds to business opportunities below the typical
investor threshold in both size and risk/return profile
 Breaking new ground, building business skills, and demonstrating financial viability in an
immature market where capital is scarce due to combination of real and perceived risks
More information. http://www.theimpactprogramme.org.uk/ and http://www.cdcgroup.com/dfidimpact-fund.aspx
37
5
STRATEGIC ALLIANCES IN INNOVATIVE FINANCING
Sida’s innovative financing is dependent on strong partnerships. These include ‘old’
partners, such as International Finance Institutions (IFIs) and DFIs, but with whom new
forms of cooperation are structured. Other partners are new to Sida, such as the
philanthropic foundations, or new initiatives created by organisations such as PIDG. There
are also bilateral strategic alliances with other donor agencies with which Sida has had
little or no cooperation historically such as USAID. This chapter reviews three of Sida’s
key strategic partnerships for innovative finance: USAID, the Gates Foundation, and
Swedfund.
5.1
USAID
USAID has a long experience of independent guarantees and has done numerous
transactions. A useful approach for Sida with its remodeled guarantee system in 2009 was
to enter a partnership with USAID. A Memorandum of Understanding (MOU) was signed
in 2010 between the institutions that would, in particular, cover microfinance and SME
institutions and banks that had as a target group underserved but creditworthy clients.
USAID, with an established program, Development Credit Authority (DCA) took on the
role of agent. DCA structures and processes the guarantee transactions, manages any
claims processing and does the monitoring of the joint operations. The identification of
potential guarantee transactions has been a joint effort. Sida has typically participated in
project identification missions and in due diligence processes. Much of the dialogue has
taken place between the head offices but increasingly the embassies have participated.
Sida and USAID have jointly granted eleven partial credit guarantees (four in Kenya, two
in Bosnia-Herzegovina and in Uganda, and one in Mozambique, Moldavia and Zambia).
The two institutions have shared the risks on a pari-passu basis and have provided
comprehensive guarantee coverage of between 50 – 60 % of the loan amounts for a 7 to 10
year period. On occasion, Sida´s risk coverage has been slightly larger than that of USAID.
There has been a similar split in the grant funding that has accompanied the guarantees.
USAID often takes the technical assistance portion while Sida focuses on the needed
subsidy element. The total guarantee amount for these “portfolio” guarantees has been US$
94 million. The two organisations have also offered a joint guarantee of up to US$ 50
million for the Pledge Guarantee for Health initiative. Sida has set aside a reserve of US$
750 million for its share of these guarantees. There is substantial headroom for additional
transactions.
Through a MOU signed in 2013 a new joint innovative initiative is being undertaken. Sida
describes it as “a momentous cooperation with the biggest investment in Swedish history
and the largest partnership with another grantor in the history of USAID”.25 The focus is
on the “power of bright ideas on solving the problems of the world’s underprivileged
population.“ Sida is joining with USAID to promote and fund three of its five Great
Challenge funds:

25
Making All Voices Count, see description under Challenge Funds.
This and the following quotation are taken from a Sida official publicity handout
38


Powering Agriculture, which targets clean energy within the agriculture sector. It
is being funded by Sida (US$10 million through a grant), USAID, African
Development Bank and Duke Energy, a major American energy company for a
total of US$ 25 million.
Securing Water for Food, which tackles the issue of clean water by innovations in
areas such as water efficiency, reusing waste water and resilience to drought
through water capture and storage systems.
The strategic alliance with USAID has many advantages for Sida not least that it allows
Sida to piggy-back on USAID’s technical capacity in designing and implementing large
scale projects in guarantees and challenge funds. But this also has a cost – the United
States and Sweden have to a degree different political agenda behind their development
cooperation, which may spill over into project design.
5.2
GATES FOUNDATION
The Gates Foundation is the largest philanthropic organisation focusing on health in the
world and they represent a key partner for Sida in developing forms of innovative finance.
The two organisations have similar values and priorities in the health sector. The Gates
Foundation has been a significant source of innovative models, with a program
development unit dedicated to finding solutions to address health challenges in the
developing world. For approximately 15 years, Sida has been a member of a broad privatepublic health partnership where Gates Foundation has a substantial influence. Sida has
tried to influence the dialogue emphasizing the possibilities to combine upstream
innovations with support to national health systems and the internal efficiency of the
mechanisms set up.
Sida facilitated a study in 2009 with the objective to determine whether Sida’s financial
instruments could assist the Gates Foundation in finding the keys to enhancing existing
funds and to catalyze and leverage the private sector towards addressing the needs. Around
the same time, a more direct and focused partnership26 was created around a specific
program where the objectives of the Gates Foundation did run in parallel with visions
developed in Karolinska Institutet (KI) and where Sida could participate with its flexible
independent guarantee system. This resulted in the creation of the Global Health
Investment Fund.
The parties signed an MOU in 2011 in which they expressed their wish to partner in
sharing the risks involved in scaling up funding beyond aid and aid-related resources. The
Gates Foundation had already established an alliance with JP Morgan Chase & Co, a bank
with a strong interest in raising funds for social impact projects and the capacity to take on
the role of structuring a facility, involving multiple stakeholders. In 2012, Sida partnered
with the Gates Foundation on the establishment of a Volume Guarantee program in which
the two suppliers of contraceptive implants for women, Bayer and Merck, agreed to
produce and sell 27 million and 13 million respectively of implants at a predetermined
price, which was significantly discounted from the prevailing market price. Additional
26
Gates philosophy is summed up in his latest annual letter: “Our foundation is teaming up with partners around the
world to take on some tough challenges: extreme poverty and poor health in developing countries … We focus on
only a few issues because we think that’s the best way to have great impact”
39
partnership initiatives are in the process as Sida is actively looking into new possibilities
connected with Grand Challenge Funds being promoted by the Gates Foundation.
Box 3: The Gates Foundation
Bill and Melinda Gates created the Gates Foundation in 2000 as a public-private partnership and
started launching funding of new vaccine development for children in the poorest countries.
They provided US$750 million up-front to make it have an immediate impact. They founded
(and have taken the lead role in) GAVI, the Global Alliance for Vaccines and Immunization to
address the challenge of bridging the gap between the needs and the available resources and
opportunities. Donors, including Sida, hesitated initially when confronted with this mode of
vertically addressing health issues, being more comfortable with a broader, horizontal approach
where health problems would be addressed at a basic level such as through primary health
facilities. However, the possible impact of working upstream with R&D in focus in order to
provide vaccines against TBC, HIV/AIDS, malaria, diarrhea, with the involvement of
universities and research institutions on board as the major pharmaceutical companies, was soon
evident. Sida was an early participant, joining in 2002 with a small contribution that has
increased over time. As of 2013, GAVI has mobilized US$8.4 billion from a total of 36
multilateral organisations, bilateral donors, charitable trusts, private companies and individuals.
The Gates Foundation represents one-fourth of the total funding and Sida 3.6% thereof. GAVI
has also given large contributions to IFFm and to various Advance Market Commitments. The
Gates Foundation has also been a major funding agency for the Global Fund, together with
Sweden and other donors.
5.3
SWEDFUND
Background
Swedfund is a limited liability company owned by the Swedish state (up to early this year
through the Ministry of Foreign Affairs, now through the Ministry of Finance). Swedfund
has during its 30 years of existence as the Swedish DFI invested in more than 220
companies together with strategic and financial partners. For a long period of time the
investments had to be in tripartite joint ventures, where a local and Swedish company
partner had the equity majority while Swedfund came in as third minority partner with
equity participation (maximized to one third of the total equity capital) or loans.
Swedfund is among the smallest European DFIs. The fund is also small in comparison to
its Nordic counterparts. Its investment portfolio is only about one quarter of that of
Norfund and it is substantially more limited than those of IFU (Denmark) and Finnfund.
The active Swedfund portfolio at the end of 2012 was 91 projects while IFU had 253
projects in its portfolio. Further, while Swedfund´s total investment portfolio was 8 % of
the annual Swedish aid allocation, the corresponding figures were 129 % for FMO, 45 %
for Finnfund, 29 % for Norfund and 24 % for IFU.27 In comparison, FMO (the
Netherlands) is the giant among the European DFIs with 850 projects and an investment
total of EUR 6.3 billion, i.e. 20 times higher than the Swedfund portfolio.28
Collaboration with Sida
In one of the first Sida independent guarantee projects, the Maputo harbor project,
Swedfund had a limited role in which it participated with FMO in a loan consortium. Since
27
Swedfund presentation 3 mars 2014. Figures referred to are from 2011.
28
EDFI annual report 2012
40
2009, there has been no substantial Swedfund participation in any international project
linked to Sida guarantees. This is in contrast to the participation of other DFIs. Examples
include KfW in the GHIF and ARC projects, IFC in the GHIF, EIB in the Global Finance
Consortium project and AfDB in the African Guarantee Fund as well as in the EcoEnergy
project. FMO has also had a prominent role in structuring GuarantCo and participates as
one of its counter-guarantors, while KfW is the principal investor in the International Crisis
Facility – Debt Pool (ICF-DP), an initiative within the PIDG organisation.
The collaboration between Sida and Swedfund over the last few years has been strained,
and the relationship between the organisations more characterized by disputes than fertile
cooperation. This is stark contrast to similar organisations in the Netherlands, Denmark or
Norway.
Future collaboration with Sida
A stronger collaboration between Sida and Swedfund would be beneficial for the Swedish
aid program. PPDPs are an obvious area for collaboration. The first such project that Sida
supported was a result of a Swedfund investment in a Scania subsidiary in Iraq. It has been
a fruitful collaboration for all parties. Swedfund staff has suggested the idea that
companies in Swedfund’s portfolio could be platforms for PPDPs in a variety of countries
and sectors.
There are other platforms from which a renewed and more dynamic cooperation could be
launched. One of them has already started, namely freestanding portable guarantees offered
by Sida, which Swedfund can use to assist clients (e g venture capital funds) to take up
bank loans. If the guarantee would be against first loss there is a possibility that a loan
structure be established where senior lenders with lower risk appetite could come in. In a
current arrangement Sida and Swedfund have contracted a framework guarantee agreement
of 45 MSEK, subsequently increased to 100 MSEK. However, it has only been used for
two projects. A further commitment has been put on hold because of differences in
approaches on how to handle a distressed company, whether to liquidate it (Sida’s
approach) or to restructure it by providing additional funds or extended time to effect
repayments (Swedfund’s proposal). No doubt the parties could resolve this impasse
through a dialogue and move on.
A concrete opportunity is currently being discussed between the two agencies. The
Nairobi-based African Guarantee Fund has been set up by the African Development Bank,
Danida and the government of Spain with a total equity participation of US$ 50 million.
The mandate of AGF is to provide guarantees to SMEs and to banks’ on-lending to SMEs.
The gearing ratio is 3:1, implying a maximum guarantee capacity of US$150 million,
which has already been committed. Sida has been asked to provide a counter-guarantee
(reinsurance) to enable AGF to continue its expansion. The equity capital of AGF is
structured in three layers – Category A with highest risks intended for donors (where DFID
has indicated preparedness to come in – presumably via a trust fund), Category B for DFIs
(including AfDB) and Category C to private sector investors. This might be an opportunity
for Swedfund to partner with other DFIs as owners of Category B shares and with Sida
using its guarantee facility. Both parties would participate with their respective instruments
and would contribute with their specific skills. A new forum for dialogue might appear
where the Swedish Embassy in Kenya, responsible for regional cooperation with Africa,
and the regional office of Swedfund would participate actively.
41
5.4
POTENTIAL PARTNERSHIPS
Overall, the landscape of stakeholders in development using forms of innovative finance
has been expanding. The list of funders encompasses participants from the public and
private sectors as well as philanthropic and social impact investors among others.
Consistent with an international trend of new combinations of actors and partners, donor
agencies have moved from a pattern of cooperation with three key partners: governments
in developing countries and their authorities, multilateral organisations, and civil society
organisations, to a system involving a large number of old and new potential partners
schematically described below:
Figure 4: Multiple stakeholders in the innovative financing space
ODA
Sida cooperates with some of these but has so far not engaged with others. For example,
Sida has not had any significant engagement with the growing number of so-called impact
investors (which are seeking both a social/developmental and financial return on their
engagements). Nor has Sida had any direct engagement with the flow of remittances from
richer countries to poorer, currently estimated to be over US$ 400 billion per annum.
If Sida intends to significantly scaling up its innovative finance, Sida needs to take a
strategic look into the landscape rather than operate re-actively. If Sida on the margin can
influence for example remittances or major flows of foreign direct investments, the impact
could be very substantial. A few years back, Sida attempted such an approach in landrelated investments. Noticing the major investments in large-scale agriculture in Africa, not
least by China and other Asian countries, Sida initiated a process to see how Sida could
influence these investment flows along Sida’s values, hence play a catalytic role towards
more socially responsible investments. In this process, an inventory of some hundred
potential partners was undertaken. The process was put on hold due to its controversial
nature, and critique from the NGO sector.
A further analysis of potential new partners is proposed as a topic for further study in phase
two of this study.
42
6 CHALLENGES FOR SIDA IN INNOVATIVE FINANCE
This chapter draws from case studies and interviews and summarizes the main challenges
for Sida going forward. Challenges described immediately below include organisational
and strategic issues. The second part of this chapter specifically addresses how Sida’s new
results strategies can underpin intentions to scale up and further develop innovative finance
in Sida.
6.1
ORGANISATIONAL CHALLENGES
Sida as a pioneering, risk-taking organisation
As illustrated in various cases discussed in this report, Sida has been an early participant in
innovative financing and continues to be able to play a pioneering role in new and
potentially high-risk ventures. In some ways, this reflects Sida’s history from the 1960s
and 70s when Sida was a pioneering donor in ventures such as integrated rural
development, population control, reproductive health and support for democracy and
human rights. Hence, there is a culture of pioneering in the organisation as well as in the
overall Swedish aid administration. This is critical as a platform for a small, underresourced organisation (in terms of staff) to be innovative. Maintaining such a culture is
critical, not only for new financing mechanisms, but for Swedish aid in general.
Contributing to Sida’s ability to be pioneering is the governance structure in the Swedish
aid system that allows for experimentation due to close links between Sida and the
Ministry of Foreign Affairs, a considerable degree of informality and joint problem solving
between these entities. Sida is less tied by a rigid formal structure than many donor
agencies, a factor commented on by many of its partners. The development of the
guarantee instrument over time, and the unique flexibility of this instrument is a good
example.
Many of the innovating ventures in finance have been the result of the initiatives of
‘intrapreneurs’ within Sida. They act as change agents to drive a certain idea, often in
opposition to the bureaucracy. For Sida to continue to be innovative, it is essential to allow,
and even incentivize creative forces and creative people to flourish. Various administrative
routines and control systems can easily become an enemy of innovation.
Need for staying power
While Sida has been at the forefront in some innovative mechanisms, there is a tendency
for program fatigue to set in. This appears to be time-related due to the burning out of the
original intrapreneurs. The demanding tasks of moving complex, pioneering projects are
then left to staff members without the same personal commitment who act more as
caretakers than developers. Frequent shifts of personnel further reduce the personal
interest. There is also a tendency to view a program, even those that are successful or that
are continuing to innovate within the program, as no longer “new”, innovative or
interesting, consequently not worth continuing to follow it or develop it further. It is often
over time that programs can expand on original innovations as stakeholders become
experts and identify initially new approaches or needs. This is an opportunity currently
being missed in the search for the next “new” idea. PIDG is an example of organisational
fatigue as is Sida’s handling of the IAP challenge fund.
43
Needs to standardize and scale up innovations
An effective organisation must both be able to innovate and to transform innovations into
replicable ‘products’ that the organisation can scale up and produce in volume without
recreating the product each time or relying on an individual expert’s experience.
Standardization and replication of (proven) innovations require established systems,
procedures, manuals, well-documented models, good internal communications and inhouse technical expertise. It needs models that can be taken down from the ‘shelves’ and
be replicated. Innovative financing structures need this more than many forms of assistance
as they are technically complicated and new to the user.
As discussed below, even if there was a system to standardize some of its products to use
them in other context, this issue is linked to Sida’s ability to execute projects without
relying on their partners to undertake all of the implementation work. For example, Sida
has co-guaranteed several transactions with USAID under the DCA program. But it is
USAID that has the infrastructure to execute, replicate and monitor these guarantees both
at headquarters and in the field where US Embassy staff have the capacity to carry out
project preparation and project monitoring.
The gap between centre and field
Our interviews in Sida indicated that at the Embassy level there seems to be a perceived
pressure from ‘above‘(management, government) that the organisation should be
innovative and apply innovative instruments. However, limited staff resources prevent
much of this. Further, the ability to learn from application of the new instruments, assess
results, and improve on them is constrained by time, knowledge and experience. (This
issue is linked to the point on standardisation.) There is a risk in innovative financing that
some sections of the headquarters push ahead with new ventures, while the rest of the
organisation has problems in catching-up and to applying the new instruments. Sida needs
to develop mechanisms and internal communications processes by which innovations are
disseminated and can be applied throughout the organisation. This need is reinforced by
two key recent systems changes in Swedish development assistance:


An increasing share of the aid budget will be implemented by the Embassies. For
example, central budgets to design and implement guarantees, challenge funds and
PPDPs are reduced and shifted to Embassy level.
The new result-strategies introduced by the Government.
Too much piggy-backing?
The pressure to disburse, the high cost of pioneering and the shortage of staff are all strong
incentives for Sida to join innovative financing mechanisms invented by others rather than
do the pioneering work itself. Such a strategy can be rational for a small aid organisation,
but has some draw-backs. First, the targeting of Sida’s resources is less precise as Sida has
to accept other donors/agencies priorities, whether in terms of country focus, thematic
approaches or political agendas. Second, too much outsourcing undermines valuable
learning and accumulation of experience over time, especially if Sida acts as a largely
passive partner. Consequently, Sida needs to find the right balance between joining
innovations by others and undertaking its own ventures, ideally also with the participation
of others. In the current situation this requires more from Sida’s own innovations. This, in
its turn, requires managerial patience, sufficient resources, freedom, support and incentives
for the staff involved, and concerned explorative efforts. The tendency by Sida to piggy-
44
back was commented upon several persons interviewed, with staff lamenting that Sida is
not more often in the front-seat.
Constraining regulations
As a government authority, Sida operates in a political context and is governed by various
laws and regulations. Innovative financing as applied by Sida tests the borders of such
governing structures that often are general for the Swedish administration. As Sida’s
mandate is quite different from most other authorities and agencies, these regulations might
make little sense from a Sida and development perspective. Examples of such regulations
are EU’s de minimis regulation on maximum subsidies to enterprises in the EU, and the
Capital Supply Ordinance, and, to some extent, also the Law of Authority Responsibility.
The interpretation of such regulations and laws in Sida’s operation can at times be rather
arbitrary, person-based and shifting over time without clear justification.29 In a global
context, Sida is in many ways more restricted in its practical applications than, for
example, DFID. However, the opposite is also true, as reflected in the application of the
guarantee instrument in which Sida seems to have more flexibility and headroom than most
donors. In general, Sida seems to take a more cautious approach in the interpretation of
regulations than warranted, again, guarantees may be an exception from this. It is clearly
the case in Sida’s own administered challenge funds, however.
The gap between ex-ante and ex-post in innovation
Embedded in the concept of innovation is that it is something new. As reflected in this
report, the innovative financing mechanisms highlighted are often very new, many of them
yet in the design stage. To what extent these really will deliver results linked to the
overriding objectives of Sida are in the form of expectations, rather proven or based on
evidence. While Sida has applied challenge funds for a few years, the outcome of these in
terms of development impact is unknown, and might not be evident for another 5-10 years,
especially to what extent the efforts create anticipated systemic impact. (In contrast, older
innovations, such as the PIDG facilities to which Sida contributed, have demonstrated
impacts, but these results are not used as the basis for additional innovations by Sida.)
Innovative finance is therefore to a large extent a matter of expectations in terms of aid
effectiveness. As a leverage mechanism, the feedback is of course much quicker, but this
aspect is, on the other hand, linked to additionality and counterfactuals. There is a tendency
in some projects to exaggerate the leverage effect and neglect the question of
counterfactual. Given Sida’s new result-strategy framework, the focus on assessing impact
needs to be stronger and also aligned to the indicators to be used for assessing results and
performance in these strategies.
Missed opportunity – collaboration between Sida and Swedfund
In a global context, some of the more innovative models of development assistance take
place in the cooperation between the aid organisations and the DFIs. A principal example
is the longstanding cooperation established in the Netherlands between DGIS and FMO.
Similarly, the emerging constructive collaboration between Norad and Norfund is an
interesting example. The Norwegian government’s interest in continuously strengthening
29
The interpretation of regulations can sometimes create absurd situations: for example, in IAP Sida limited the grant
support of awards to winning companies to EUR 200,000 (SEK 1.7 million) with reference to the de minimis rules,
while in AECP, Sida funds of up to US$ 1,5 million (SEK 10 million) can be granted to what might be the same
company in the same location.
45
Norfund with annual additions to its capital paves the way for many innovative approaches
some of which also include Norad. In Germany, DEG and KfW are key instruments in
innovative finance. Such synergies appear absent in Sweden. While there had been
different efforts of collaborations between Sida and Swedfund, the relationship today is
almost non-existent and largely acrimonious, acutely reinforced by the instruction by the
Government that Sida should review the option of direct investments. One underlying
reason might be that in relative terms there is a larger difference in budget allocations
between the donor agency and the DFI in Sweden than for any other European country.
This gap not only means that Swedfund is limited in its operations, but it also contributes
to the inequality in the relationship. Overall, the Swedish development assistance is losing
the opportunity for one of the more dynamic aspects of development finance by the frozen
relationship between its main organisational instruments.
Management of guarantee and loan risks
As already noted Sida has managed the guarantees in its portfolio extremely well to date.
Sida has not incurred any substantial losses during the last 20 plus years. The guarantee
reserve has grown over time to the point that the government reduced it by approximately
SEK 800 million.30 The guarantee premiums that have been charged (in the aggregate)
have been sufficient to cover the risks. Until recently, Sida provided a standardized
product, the Concessionary Credits. The guarantees linked to credits covered contract
financing and had substantial similarities with export credits that EKN guarantees. So, with
similar products, EKN could provide all the necessary expertise to determine an adequate
risk assessment.
This situation changed when the independent guarantees were introduced. There is no
longer any standardized product and the guarantees cover new and untested risks. Each of
them provides risk coverage for a unique challenge. Collectively they add up, in our view,
to considerable risk. As the “traditional” guarantees expire and the cushion that they
provide disappears from the portfolio, Sida’s overall risk exposure will increase. (This is
also the case with the new development loans in terms of risk management and exposure).
Unique guarantees means that there is no one established risk-based guarantee fee
structure. The fee and the subsidy element to be paid into the guarantee fund are now set
opportunistically. It is dependent on the expert advice that Sida gets and its own judgment.
And with a new structure, there is no historical experience on which to base risk
assessments. While we recognize the benefits to having a flexible guarantee product, there
is a need to have a consistent analytical approach.
Innovation implies experimentation and the assumption of new and less tested risks. While
a guarantee loss implies a potential reputational risk for Sida, having a clear rationale for
taking the risk and properly pricing it could mitigate negative publicity. Our
recommendation is that Sida should tighten up her risk monitoring. A high-level risk
management committee should be established which meets regularly to evaluate the
portfolio’s risk exposure. A premium model should be developed to guide Sida staff in
negotiating premium levels with partners and stakeholders. An officer with a line
responsibility outside the Loans and Guarantee department should have oversight of
guarantee risk exposure as one of his/her principal duties. However, this proposed internal
30
The repayment referred to a specific transaction in India under the CC system and to an interest differential which had
been favourable to Sida. A similar situation will most likely not be repeated.
46
risk management system should not replace the external monitoring system by EKN and
the National Debt Office.
6.2
CHALLENGES WITHIN SIDA’S RESULTS STRATEGIES
The results-strategies and the new aid platform introduced by the Government in late 2013
and 2014 pose major challenges in the use of the innovative financing instruments. The
leading principles behind the Government’s result strategies are




Having poor people’s needs at the center for all of Sida’s work.
Focus on themes linked to poor people’s needs, rather than support to conventional
sectors.
Designing Sida’s support towards the overriding results/objectives – making aid
outcome-driven rather than output driven.
Being able to measure results and draw the conclusion from achieved results in future
allocations of aid.
As discussed earlier in this report, Sida will have results-strategies at three levels: (i) for
partner countries and regions; (ii) for the cooperation with multilateral organisations, and
(iii) for thematically oriented development assistance. Results-strategies at country level
have been prepared and issued by the Government for selected countries, including
Myanmar, Somalia, South Sudan, Sudan, Tanzania and Zambia. Others are being prepared.
There are also selected result-strategies for thematic areas, including sustainable
development (environment and climate), human rights and capacity development.
The current portfolio of Sida’s innovative financing is diverse, covering many themes and
areas. As much of the applications are reactive, i.e. responding to the proposals of partners,
the portfolio does not have a strategic focus. This is also true for sub-portfolios such as for
PPDPs Challenge funds and Output-Based Aid. In Sida’s new result-strategy framework
such an approach will not fit well. Sida needs to be considerably more pro-active in the
choice of interventions and, above all, assure that the use of innovative financing (as all
other instruments) is emanating from the result strategies, rather than the latter being a
product of the former.
Thematically, the current use of innovative financing in Sida versus the themes/objectives
in the new Government platform varies considerably. For some of the themes/objectives,
the instruments are applied extensively, for others hardly at all. The table below gives
some examples:
Table 4: Experiences of innovative financing
The Government’s
overriding sub-objectives
Strengthened democracy
and equality, increased
respect for human rights
and freedom from
oppression
Improved opportunities for
poor people to contribute
to and benefit from
economic growth, and
have access to good
Current application of innovative financing
Comments
An upcoming guarantee for media
development in Uganda with Oxfam.
A challenge fund with USAID – Making All
Voices Count. A planned guarantee with ADB
will have as an objective to include ADB’s
lending with Sida priorities such as democracy
and human rights.
Several guarantee projects jointly with USAID
with focus on agriculture, such as SME
development in Kenya; value chain
development in Mozambique, micro finance
with Deutsche Bank, biogas development in
Limited use so far. In the new
results-strategies, requiring a
creative effort, perhaps linking
to new partners. PPDPs with a
focus on the CSR of
multinationals might be an
approach
The range is already
considerable, but can be
scaled up at country level.
Public-private investment
funds are a key instrument, but
47
education
Improved environment,
reduced climate impact on
strengthened capacity
against negative
environmental impact,
climate change and natural
disasters
Improved basic health
Protected human security
and freedom from violence
Saving of lives and
maintained human dignity
Tanzania, Challenge funds with USAID in
powering agriculture in Africa; Africa
Enterprise Challenge Fund, in PPDPs in
coffee farming to adapt to climate change in
Tanzania, Dominican Republic and Vietnam;
improved conditions for workers in garment
factories in Cambodia with HM in a PPDP
Education, on the other hand, does not feature
in these instruments, except vocational
training in maintenance of heavy duty
equipment
Examples: Guarantees for wind energy in
Pakistan; AECF has energy as a focal area.
Sida is undertaking a number of major
projects using guarantees in partnership with
Gates Foundation, USAID and others with
focus on vaccinations, contraceptives and
volatility of aid pledges. Also some PPDP,
such as school milk in Zambia for improved
nutrition. Sida is requested by the Government
(2013) to develop a challenge fund for sexual
and reproductive health.
Innovation for Peace, a CF with GIZ in
Colombia
African Risk Capacity
also the considerable number
of funds being set up by and
with impact investors.
Sida needs to investigate how
its innovative financing
instruments can be applied in
education
Innovative financing well
established internationally as
elaborated earlier. Sida has a
more limited application so
far. New instruments being
developed exemplified in this
report. Scope for considerable
expansion. Options mainly for
regional and/or global
approaches in multi-donor
initiatives.
Application of innovative
financing well established,
especially for vertical, global
programs.
Need for strategic thinking of
new applications
As above
Does innovative finance have thematic limitations?
One interpretation of the differences noticed above, is that the applied instruments are
better suited for certain themes than for others. In health and in economic growth for
employment, guarantees, private-public funds and challenge funds are already being used
quite extensively both internationally and by Sida. The reason is that the instruments can
work directly with the private sector and compensate for market failures, provide support
in financing with commercial capital is scarce, reduce risk, etc. Another reason is that a
key dynamic player in aid, Gates Foundation, has made health its core business. The
international experience is also in the environment and in efforts to mitigate climate
change, innovative financing is commonly applied, but less so by Sida. There is an
opportunity to expand more into climate change.
Access to basic education is a theme that Sida does not seem to apply innovative financing
mechanisms to any extent in spite of the fact that a large percentage of education in
developing countries are carried out in the private or quasi-private sector. Sida might seek
new partners in this field, and more systematically pursue the application of innovative
instruments in order to leverage ODA funds, which go into basic education. KfW might be
such a partner.
48
In the balance of the thematic areas for new Swedish development assistance, such as
democracy, human rights, equality and human security, there has been limited application
of innovative financing instruments by Sida. To a certain extent this is systemic issue: the
instruments are less well suited as the themes are not ‘market-based’. However, it may also
be a question of efforts to design the instruments to fit such themes. There are exceptions:
Sida is, for example, applying challenge funds to find models to promote peace using the
private sector as in the Innovation for Peace in Colombia, and to promote democracy and
human rights, the USAID-Sida Challenge Fund Making All Voices Count. PPDP projects
with a focus on multinational companies’ CSR work can have considerable elements of
human rights approaches. (An interesting project of this nature, providing female textile
workers with a hotline against abuse, was being developed in cooperation with HM in
Bangladesh, but was rejected by the Embassy). In terms of partnering with philanthropic
funds, the opportunities for innovative financing also in themes such as democracy, peace
and human rights, should be considerable.
Integrating innovative finance in country results-strategies
It is a considerable challenge for the Embassies to systematically and creatively consider
whether guarantees can be applied effectively to address some of the objectives in the
strategy, or whether challenge funds, PPDP, output-based aid or other mechanisms are
suitable. For the Embassies to effectively do so, the staff must be familiar with these
instruments, understand what they can achieve, but also their complexities, risks and
shortcomings – as well as have access to internal experts. Without that knowledge or
access, there is a risk that the tools are suggested more in response to a pressure to be
‘innovative’ than an analysis of what is appropriate or not. Different models for
transmitting such know how are being suggested in Sida such as manuals, help desks, case
studies, information campaigns, training and so on.
The argument is not that each Embassy should have specialists on all forms of innovative
financing instruments. There is a need to keep the technical key competences central.
However, Embassies must have sufficient know how to identify opportunities and knowing
when to call upon and receive central support to develop projects and programmes
technically.
In line with the initial discussions with Sida when the gap analysis began, we are not going
into detail how Sida should organise itself in order to fully utilise the innovative financing
instruments in the results-strategies. This should be one of the subjects of phase 2 of this
work.
A tentative model how Innovative financing can be used in a country resultsstrategy – the case of Tanzania
Below is an idea how Sida’s current innovative finance instruments might be applied in
Tanzania’s new Results-strategy. We have chosen Tanzania among the country resultsstrategies as it was one of the first such strategies established and it is also the largest
program:
49
Results strategy for Tanzania 2013 – 201931
Budget frame SEK 5,5 billion
Expected results in the strategy
Access to safe and sustainable energy,
with the ambition that at least 300,000
persons get access to electricity
Developed agricultural markets in order
for poor people, especially women, to get
jobs
Improved security in land-rights for
smallholders and investors
Increased number of children to get
access to basic skills in school
Increased number of young people
undergoing vocational training with the
ambition that at least 10,000 get jobs
Increased opportunities for women and
young people to start and manage
productive businesses
Increased capacity and reduced
corruption in the Tanzanian
administration
Strengthened capacity in the civil society
to demand accountability and increased
knowledge about human rights
Options for innovative finance
-Guarantees in private infrastructure (energy) development?
-Opportunities in PIDG?
-Challenge fund to develop new energy systems for rural areas?
-PPDP in energy supply with relevant private supplier?
-OBA in energy supply?
-Cooperation with Swedfund for energy investments in Tanzania?
-Engage in private-public funds aimed at the agriculture sector such
as AAC?
-Special window in AECF for Tanzania agro-businesses?
-Engagement in SAGCOT?
-Guarantees for large-scale agriculture investments such as Eco
Energy?
-Cooperation with Swedfund for agricultural investments in
Tanzania
-PPDP with investors in large-scale agro-businesses to address landright issues?
-OBA in supply of primary education?
-PPDP in private schooling with relevant enterprises?
-Advance Market Commitment for development of innovative
educational material to suppliers?
-PPDP with relevant Swedish companies such as Scania and Volvo?
-Explore other major employers and their needs in vocation training
for new PPDPs?
-Guarantees for private investors in vocational training?
-Challenge fund for seed capital start-up companies by female
entrepreneurs and youth (linked with training)?
-Cooperation with Swedfund for seed funding?
All voices count, Challenge fund with USAID. Option for special
window for Tanzania?
-Challenge fund aimed at civil society organisations with best ideas
on how to promote accountability and human rights?
-Loan and/or guarantee for media development?
It should be stressed that any innovative financing model should not be applied for its own
sake, but on its merit in comparison to or in combination with alternative instruments. The
underlying reasons for innovative finance must be kept in mind: as a means of leveraging
additional capital to ODA; as a means of bringing in new players to address development
issues; and as a means of doing things more effectively and getting better value for money.
31
In official translation from Swedish
50
7
FURTHER STUDIES
The Terms of Reference for the present study includes providing issues for further
investigation in a second phase. The second phase would allow Sida to prioritise and
operationalise its role as a relevant innovative development partner in the field of
development finance. Below are some suggestions:

Undertake an in-depth international review of innovative finance, and especially
review what leading donors are thinking and planning in this respect, including
agencies such as DFID, KfW, DGIS and USAID.

Review the priorities of new entrants in innovative finance such as social impact
investors and foundations and identify additional strategic alliances.

Review the guarantee portfolio risk and its management as well as the issue and
pricing of risk.

Review how Sida can transfer its institutional knowledge and the use of innovative
finance more systematically from the centre to the Embassies, providing required
technical backup and procedural support.

Review how Sida can increase its effectiveness in transforming the use of
innovation in development finance to more ‘standardized products’ in order to scale
up the application of these instruments.

Review whether Sida should be permitted to make direct investments as has been
requested and the consequences this would have in the Swedish development
system in relation to Swedfund

Review the possibilities to provide guarantees of bonds issued on local capital
markets, possibly in collaboration with GuarantCo.

Study whether a structure could usefully be developed where Sida (AAA-rated)
guarantees would be combined with loan or guarantee products issued by recipient
countries or sub-regional banks/institutions, which have a non-investment grade
rating, in order to create possibilities for them to raise funds on international capital
markets.

Make active efforts to work with Swedfund and with the Swedish pension funds.

Review how Sida effectively could interact with major capital flows to
development countries, such as remittances.
ANNEX 1: TERMS OF REFERENCE
In separate document
ANNEX 2: DETAILS OF THE SIDA INNOVATIVE FINANCE
CASES
THE GLOBAL HEALTH INVESTMENT FUND (GHIF)
Issue addressed Only 10 % of the research on global health is devoted to tropical diseases
while tropical diseases are 90 % of the burden in terms of population affected in the poor
countries. Essentially, pharmaceutical companies are disinclined to invest in R&D in products
where the potential commercial return is limited as the purchasing power of the potential
clients is extremely low. At the same time, as the problem is related to global public goods, no
one government has the incentive to provide funds for the high development costs.
There are a large number of potential medical innovations that are kept on hold due to the cost
of late stage clinical trials. Such trials require resources that far exceed charitable funding
capacity and traditional aid programs. During this period the investable funds should applied
to various companies in the medical field that take promising vaccines through the costly
clinical trial phase to a market where poor people suffer from tropical diseases.
The structure: GHIF is structured a not-for-profit trust set up as a private for-profit charity
fund. None of the funds available to GHIF are invested as equity capital. These investable
funds are partially guaranteed against loss. The Gates Foundation is the Lead Guarantor of
GHIF who is the beneficiary of the Gates Foundation guarantee. Sida is providing a coguarantee, channeling its ten-year partial risk guarantee through the Gates Foundation. The
Gates Foundation covers the first-loss risk of 15 % of the total investment and Sida has
guaranteed the second loss risk of 5 %. There is third loss tranche of 40% that is shared paripassu between Sida and the Gates Foundation (3/8th and 5/8th thereof respectively). The
remaining 40 % of the risks are uncovered by the guarantee and will be assumed by the
market, be it patient and institutional investors as well as producers of pharmaceutical
products. The Gates Foundation may dispose of its commitment to other interested guarantors
but will always have to retain 5 % of total investment.
GHIF targeted a fund of US$80 million, but on the strength of the guarantees, it was able to
raise a total of US$108,9 million. The funders include two U.S. and one British company
(Merck, Pfizer and GlaxoSmithKline), two pension funds (Storebrand of Norway/Sweden and
Axa Group of Switzerland/France), one British charitable organisation (Children’s Investment
Fund Foundation), Grand Challenges Canada (funded by the Government of Canada), IFC, JP
Morgan and the Gates Foundation. KfW of Germany has also provided a grant to the not-forprofit fund.
The investors will receive their return in two ways; i) the production of the new products are
projected to provide the investors a sufficient return to justify the investments and ii) the
pharmaceutical companies would get their return through royalties or sale of products on
OECD markets and iii) the institutional investors will get their return through loan interest
and repayments.
Governance: Lion’s Head, a British company specializing in advisory, financing and asset
management services and with an extensive experience in Africa, is the Investment Manager.
Lion´s Head was part of the team responsible for setting up the International Finance Facility
for Immunisation (IFFIm). The governance structure includes a Charitable Oversight
Committee including independent experts from industry. This Committee has a veto power
over all investment proposals made by the Investment Manager and the Investment Advisory
Committee giving priority to the social impact objectives when it comes to using GHIF
resources than any commercial gains that can be obtained from the fund.
Partners: In addition to Lion’s Head as the Fund manager, the Gates Foundation and Sida are
the principal partners in the GHIF private-public partnership and have provided guarantees of
US$60 million. The public investors (governments and DFIs) have made US$30 million
available in cash for investments to which pharmaceutical companies and pension funds have
added US$25 million and US$12 million respectively. The remainder of the funds comes
from large and small charitable contributions ranging from US$250,000 contributed by a
number of high net-worth individuals to US$20 million from the Children´s Investment Fund.
In total, there are 32 investors in the first close of the fund.
Time frame: The term of fund and the guarantees is 10 years from December 2013 with a
possible extension of up to 2 years. A key aspect in managing the fund is that these company
investments take place early in the investment period. In this way, they can be brought
soonest to a commercial stage so that the investors can exit (profitably) and the concept can
be demonstrated such that new capital can be solicited for a possible follow-up fund.
Lion’s Head is actively working on finding off-takers of investable funds. Investment
decisions have been made in respect of three projects: a hypodermic syringe project (based on
compressed air), a project which includes a new method of testing HIV prevalence and a
project which may produce medicine against diarrhea. These have all developed by start-up
companies based on new technology that is aimed at extensive use in poor countries. (Their
potential use in rich countries is limited.)
Financial commitments and returns: The fund has been closed with all guarantee and
investment commitments have now been made. No specific return target has been set. A
preferred return was initially set at 2 % which was acceptable to charitable investors but
which was insufficient for the commercial ones. The split of the financial returns are 80 % for
the benefit of investors and 20 % to the Investment Manager as a carried interest (or success
fee). The pharmaceutical companies in which GHIF has invested will receive their return
through royalties on product sales on markets within OECD and other rich countries. The
other investors receive their capital with interest at exit.
Sida guarantee fees have been set in line with the project´s social orientation. They will
receive a commitment up-front fee of 0,25 % and a yearly utilization fee of 0,1 %. A
substantial amount will in addition be paid from grant funds into the guarantee reserve to
cover the substantial risks involved.
Sida´s role: The original fund idea came from both the Gates Foundation and Sida based on
their common commitment to address fundamental health problems. JP Morgan structured the
fund from the concept stage toward presentation to institutional investors, DFIs, donor
agencies and charities. Sida was fully involved in the designing of the innovative guarantee
scheme.
Risks and risk mitigation: The principal risk is that the Investment Manager will be unable to
find companies and projects that address the fundamental health problems and produce propoor affordable products and at the same time be profitable within a reasonable time horizon.
There is a solid pipeline of candidate projects that has been provided by the Gates Foundation
and others. However, there are substantial challenges involved in bringing candidates over the
various hurdles into a stage when they can deliver a return. Selecting participants with
sufficient expertise and competence to select projects and assist in supporting their
management to develop mitigates this risk. However, it is expected that the portfolio will
ultimately contain both success and failures.
Innovative features






This is the first Research & Development investment fund dedicated to addressing poverty
and health goals enshrined among the Millennium goals
A unique combination of aid, private capital and philanthropy working together with the
shared objective of developing life-saving technologies in a financially sustainable way
The use of the guarantee arrangement and loss coverage to mobilise funding from private
sector investors. By taking the second and third loss positions in the waterfall
arrangements Sida has been instrumental in crowding in substantial private capital from
multinational companies, pension funds and DFI sources
Sida affords high priority to the health sector and has much experience in providing
flexible guarantees covering commercial and political risks while the Gates Foundation
and Lion’s Head had advanced ideas and substantial resources geared towards sourcing
and developing cutting-edge technology in the health area
A 10 year time frame (with an option to extend it for two year) allows for a sufficient time
span for investors to commit funds and for results to be obtained for new medicine and
medical appliances
There is potential for replication. Investment in the fund exceeded targets demonstrating
that there is a potential source of funds for this type of investment. Depending on the
lessons learned, there might be scope to upscale it through a new fund mechanism but
with reduced funding from aid agencies, including needs for Sida guarantee. There are
also possibilities to replicate it in other sectors (e g education).
THE PLEDGE GUARANTEE FOR HEALTH (PGH)
Issue addressed: Donor agencies - be they multilaterals, bilaterals or civil society
organisations – make financial pledges months before they can process the disbursement is
made for a variety of reasons. The time span and timing volatility between pledges and actual
agreements creates serious problems and increases costs for beneficiaries. If the goods or
services are not provided in time for a rainy season or to avoid stock outs, this has
implications on the health of the targeted population. And, to get the goods there in time,
costly logistics, such as airfreight, are used which takes away from funding for the good
themselves. The uncertainty of timing of payment causes suppliers to raise the price to hedge
against the possibility of payment problems, production schedule uncertainty and inventory
management. The magnitude of this problem is significant: A Brooking Institution study in
2008 indicated that up to 28 cents of each donor dollar is lost due to the volatility of aid.
Consequently, improving the financial efficiency of these funds could benefit many more
poor people.
The issue of predictability of aid fund disbursements exists in all sectors. However, the effects
of delays may be very serious in the health sector as in situations of emergency delays may
cause death or serious calamities among poor segments of the population.
Structure: The financing process, in summary, will work as follows: A health ministry would
approach PGH with documentation confirming a donor pledge of funds. PGH would issue a
payment guarantee to a commercial bank operating in the country against which the
procurement agency may get a working capital loan and open a letter of credit in favour of the
supplier. Once the aid pledge can be disbursed, the donor pays to the bank. The role of the
Finance ministries is to commit their governments to honour the working capital loans once
the donor pledges have been translated into disbursements.
The working capital loans will be secured by the availability of a US$100 million revolving
line of credit from one or more commercial banks to be obtained by PGH. These lines of
credit are secured by guarantees provided by USAID and Sida totaling US$50 million. The
USAID/Sida guarantee is on a 50/50 pari-passu basis and is constructed as a portable first
loss guarantee thereby reducing the risk for the participating commercial banks.
All IDA countries are eligible as well as some Global Fund countries to use PGH. In terms of
commodities PGH will focus on a limited number of drugs connected to malaria, tuberculosis
and HIV and those, which are important for improvement of the maternal and child health.
An initial country focus will be developed where there is donor in depth involvement and
where their know-how of and experience from the governments systems are good and well
documented.
PGH will not make an independent assessment of the procurement agencies but will rely on
donor systems approvals and that the procurement will follow Standard Procurement
principles and thus be transparent and not subjected to corruption.
All the agreements were signed in 2013 and the arrangement is operational from Sida´s point
of view. A pilot project was tested in that PGH has negotiated lower prices of essential health
commodities with six major suppliers. With Merck/MSD a price reduction of 50 % has been
negotiated in respect of a Hepatitis C mitigating drug, still under patent and essential for the
HIV-positive population in Ukraine. A financing facility made available by the Global Fund
has been utilized in this deal. A similar transaction has been carried out for the Philippines.
Time frame: The guarantee supporting the revolving facility from the commercial banks will
be for 5 years. As the working capital loans are short-term (less than one year) the donorguaranteed loan (and the guarantee support) is expected to revolve several times thereby
generating up to US$1billion of transactions over the guarantee period. The relative long time
frame is also required as the learning curve for all participants in the scheme is expected to be
steep.
Organisational structure/Governance: PGH was established by the United Nations
Foundation with Global Fund support using funds from the US$1 billion US$ contribution
from Tim Turner, the founder of CNN. The ultimate beneficiaries will be patients suffering
from tropical diseases who will receive needed medicine in time and at a reduced cost. After a
two year proof-of-concept, the United Nations Foundation gifted PGH to a newly formed notfor profit corporation called Financing for Development (F4D). The principal donor partners
and guarantors (USAID and Sida) will sit on PGH´s advisory committee of F4D and PGH,
which will monitor the operations of the facility. F4D/PGH has several high-level advisers
supporting their efforts.
Partners: USAID, through its Development Credit Authority (DCA) and Sida through its
Loans and Guarantee facility are the partners on the donor side. The scheme requires no direct
link with the recipient countries or with those donors who will be indirect beneficiaries by
being in a position to have their assistance pre-financed and moved faster into the field. While
not partners in the scheme, The Ministries of Health in recipient countries as well as
government procurement agencies and Ministries of Finance are key stakeholders.
Finance and returns: The UN Foundation funded all the preliminary work including legal
work to put the PGH facility in operation and to build the system. USAID had already tested
the concept (using a World Bank pledge) through its funding of two pilot projects in Zambia,
where bed nets were delivered in time before the malaria season started and in Ethiopia.
Sida charged a risk-based premium by setting grant funds for part of the premium and
transferring it to its guarantee risk reserve. In this case, US$0,8 million is set aside while PGH
will pay a premium of US$0,5 million to Sida.
Sida´s role: USAID initiated this programme, tested the system in two pilots and then
approached Sida as their first choice and equal partner based on the long-term working
relationship between the agencies. The collaboration on this project is not expected to make
substantial demands on Sida´s limited staff capacity, particularly as the programme is run by
F4D.
Risks and risk mitigation: Nothing like PGH has been developed to date. Identified risks
include understanding the processes of getting pledges to disbursement and how the different
countries’ procurement agencies meet their obligations to effect the disbursements in addition
to their handling of bank funds. PGH is a start-up organisation with all of the challenges
associated with building an operating company. They have limited working capital and
operating income, as the donors have provided very limited funds; therefore, their capacity to
perform and execute transactions is a significant risk factor. In addition to commercial risks,
there are also political risks involved when so many countries are involved.
A challenge for USAID and Sida to reduce the risk will be to provide technical assistance for
the implementation phase to help PGH and other actors to manage the learning curve.
Moreover embassy staff in a number of countries needs proper training to be able to
disseminate the system and participate pro-actively in a dialogue with all actors.
Finally as a new product, it should be recognized that there are potential risks and challenges
that may not have been envisioned at the design stage.
Innovative features







PGH addresses a major funding problem between donors and recipient countries – the
volatility and timing of aid flows by offering a solution to improve the financial efficiency
of funds flows.
Using commercial lenders to assume the risks of donor pledges have not been done before
(except for limited pilot schemes by USAID)
The USAID/Sida guarantee will crowd in a commercial bank that will assume an
uncovered risk of 50% of their loan amount on a revolving basis over a five-year period
resulting in leveraging the guarantee funds. The program is projected to generate
transaction volumes of US$1 billion.
There are potential efficiency gains to be made by bundling transactions and making
purchases in bulk benefiting several poor countries
A new kind of partnership among donors will be created by two donors taking risks on
other donors´ pledges
The guarantee creates a “soft power” to incentivize donors to disburse funds quickly and
the recipient countries to do what they have agreed to do.
If successful there would be several possibilities of scaling up and replicating the scheme:
(1) pledges by more donors could be covered; (2) the scheme could see an increase in the
guarantee volume with lower risk coverage by the principal donor agencies; (3) other
sectors (e g education, agriculture or emergency relief) could benefit from similar schemes
and (4) potentially a new line of business for commercial banks could emerge once they
understand the risks of lending against donor pledges.
AFRICAN RISK CAPACITY INITIATIVE (ARC)
Issue addressed: Serious droughts affect most African countries causing loss of lives and
livelihood for poor people. Each country has to use whatever resources available to it to
mitigate the effects of the drought and to get back on a positive socio-economic trajectory.
The response of the donors (including aid organisations or NGOs) has been to provide
catastrophe aid and humanitarian assistance. The objective of the African Risk Capacity
Initiative (ARC) is to create a stand-alone pan-African risk pool through which the countries
can insure themselves against the escalating impact of weather events. Thereby an affected
country will get more immediate payments to assist in the alleviation of the consequences of
the calamity. The new type of insurance being introduced by ARC is based on the assumption
that it is unlikely that disasters occur simultaneously in several countries on the continent. The
system will be based on weather information covering a 30-year period integrated into the
Africa Risk View software developed by ARC to which is fed regularly rainfall data
measured by satellite.
The structure/project design: The African Union has with the assistance of World Food
Programme (WFP) created ARC Ltd as a sovereign-level mutual insurance company,
registered in Bermuda and governed by the ARC Agency, where all member states have a
seat. The governance of ARC Ltd is carried out by a Board of directors, chaired by the former
CEO of IFC and with representation from reinsurance companies. The states are invited to
participate and commit themselves to paying annual premiums to the risk pool. Twenty-four
countries have signed the protocol and are moving slowly towards its ratification. Six
countries (Kenya, Malawi, Mauretania, Mozambique, Niger and Senegal) have already
ratified the protocol and are prepared to take out insurance covering the 2014 agricultural
season. The success of ARC as a political instrument of solidarity and more narrowly as an
insurance system is based on additional countries joining.
The trigger for payouts will be rainfall above certain predetermined levels. The amounts of
the payout are based on the premium paid and the level of risk (self-insurance) that the
countries want to retain. In other words, how much they want ARC to pay for droughts of
various degree of severity. The system is designed to be transparent. Countries are committed
to having the seriously affected part of the population become the beneficiaries of the payouts.
Several donors have participated in the design of the insurance scheme, including DFID,
Swiss Development Corporation and IFAD. Sida has been the second largest financial
contributor in the design phase, having committed US$11.5 million to the ARC Agency. Sida
will continue to support WFP in the early operational phase and provide assistance to capacity
building aimed at improving the risk management systems.
Partners and timeframe: Donors are invited to contribute to ARC in the early start-up period
in 2014 and 2015. KfW has announced its commitment of EUR 50 million that will be in the
form of a non-interest-bearing conditional loan to be paid into the common risk pool. It is
expected that DFID soon will announce a similar contribution to the pool. Annual premiums
from the countries of approximately US$3 million will be added to the pool in order to endow
it with sufficient liquidity during its initial period. The risk capacity of ARC could be
increased further by reinsurance arrangements, whereby part of the ARC risks would be
transferred. There is definitely a market potential here which remains to be exploited by ARC.
Sida’s potential role: Sida has been invited to use its guarantee instrument to provide a risk
cover by reinsurance along with private sector reinsurers. Ideally Sida´s participation would
crowd in insurance companies and add a substantial leverage for the insurance pool. The
guarantee could be construed as a partial risk guarantee where Sida’s guarantee would be
provided pari-passu with some reinsurers, possibly allowing others to provide a less risky
position. The pricing of the risk coverage still needs to be agreed. Sida has retained an actuary
to assess the risks connected with the intervention and has got a price level established.
Ideally reinsurers using the same data would arrive at a similar level. However there is no
established, transparent market for this type of risk. The market is oligopolistic with few
companies competing and it is very volatile. Sida approach is to arrive at a level, which is
affordable to ARC and covers the full guarantee period (5 years) but does not have a market
distortion effect. Sida would be prepared to subsidize the premium and has decided that 30 %
of the estimated risk premium would be a reasonable level taking into account all
uncertainties involved in the actuarial calculations. ARC has argued that the premium
calculated at that level would be too high at this stage and would in the short run price Sida
out of the (imperfect) market.
The exploratory discussions on how to best apply the Sida reinsurance offer continues. As
long as there are only six member countries who have become contributing members of ARC,
the KfW and DfID capital injections would be sufficient to open up for providing insurance
coverage. However by 2015 a demand is expected to exceed the coverage provided by the
pool and additional capital would be needed. Sida has declared that it stands ready to
participate and to join the reinsurance pool. The objective is still to find a non-discriminatory
and non- market distorting application of its guarantee instrument that will be applied to
payouts once the ARC retention layer has been depleted.
Risk and risk mitigation: This is high-risk guarantee based on an untested idea. The risks are
based on non-financial events which are out of the control of the parties and which have few
if any ways to mitigate the risk and of paying out the guarantee. While the risk analysis is
based on 30-year weather data, it is unknown how reliable the assumptions are relating to
climate change factors and global warming effects in Africa and elsewhere. Balanced against
the risk is the value of the guarantee, which would mitigate serious risks affecting their food
security. And from a donor´s perspective this system, if working effectively, will substantially
reduce the “risk” of having to provide substantial humanitarian aid after droughts have
occurred.
Innovative features:

Establishing a pan-African mutual insurance system against drought is by its very nature
highly innovative. Internationally there is only one model with similar features, the
Caribbean Catastrophe Risk Insurance Facility (CCRIF)

The assumption of risk by African countries assume responsibility for disasters in
neighboring countries would be a new feature

A drought insurance instrument owned by affected countries as an important
complementary instrument to humanitarian assistance provided by Sida through
international channels or Swedish NGOs

The early nature of the ARC interventions would prevent unsustainable use and depletion
of natural resources which follow in the wake of natural disasters and the reallocation of
resources needed for development to short term use

The objective to crowd in international reinsurers to take substantial risks on an
uncertain market at an affordable price
ANNEX 3: SOME ASPECTS OF INNOVATIVE FINANCE
INTERNATIONALLY
The review of the international scene in innovative financing in this study has not been
extensive, but merely scratched on the surface. One of our recommendations is that Sida
should undertake a more in-debt study in the application and learning in innovative financing
by various agencies, donors, FDIs as well as private agents such as philanthropic funds and
also impact investors. In this section of the report we highlight four aspects:




Some cases of well-known innovative financing mechanisms often discussed in the
discourse of the subject.
Green bonds as a specific innovative mechanism
Three selected projects which Sida is not a part of and which are of a different
character than what Sida engage itself in.
The application of innovative finance in three dynamic development finance
institutions.
International cases highlighted in the debate
A number of innovative financing mechanisms are typically highlighted in the international
discourse on the subject. Recent reports by OECD, UNDP and the World Bank highlight, for
example, the following projects and models.

GAVI Alliance (formerly known as the Global Alliance for Vaccines and Immunisation)
established 2000 on the initiative of the World Bank and Gates Foundation was a new type of
public-private partnership, funding major disease-fighting campaigns in developing countries.
Since its launch, the GAVI Alliance has contributed to the immunization of an additional 370
million children, helping developing countries prevent more than 5.5 million future deaths
from various diseases such as hepatitis B, polio, and yellow fever. Currently 67 countries
support GAVI. Sweden was one of the original six donor countries and has contributed about
US$ 380 million to GAVI 2001-2015. The Gates Foundation alone has contributed US$ 1.5
billion to GAVI. See further www.gavialliance.org

International Finance Facility for Immunisation (IFFIm) was launched in 2006 by six
donor governments (United Kingdom, France, Italy, Spain, Sweden and Norway), to raise
money by issuing bonds on international capital markets, specifically for immunization
programs. The IFFIm repays private investors over periods of up to 20 years with the longterm ODA commitments of donor governments. This arrangement effectively allows
governments to ‘buy-now but pay later’ or ‘frontload’ ODA. The majority of resources have
been channeled into GAVI. IFFIm benefits from US$ 6.3 billion in donor contributions over
23 years from the governments of the United Kingdom, France, Italy, Norway, Australia,
Spain, The Netherlands, Sweden and South Africa. IFFIm finance is expected to prevent some
5 million child deaths between 2006 and 2015, and more than 5 million future adult deaths.
See www.iffim.org

The Solidarity levy on air tickets was launched in 2006 by the Governments of Brazil, Chile,
France, Norway and the United Kingdom. It is paid by individual air passengers from the
participating countries when they purchase their ticket and airlines are responsible for
collecting and declaring the levy. 17 countries have since the start joined and several are in the
process of joining. Most of the resources raised through the airline ticket tax are channeled
into UNITAID (see below). Sweden is not part of this initiative.

The Advance Market Commitment (AMC) for pneumococcal vaccines was launched in
2007 by Canada, Italy, Norway, Russia, the United Kingdom and the Gates Foundation. AMC
aims to accelerate the development and availability of a new pneumococcal vaccine. Donors
have committed US$1.5 billion to guarantee pharmaceutical companies the price of vaccines.
These financial commitments provide, in turn, a new incentive to vaccine manufacturers to
develop a product that might otherwise not be commercially viable and to produce it the scale
necessary to meet demand in developing countries. In exchange, pharmaceutical companies
sign a legally binding commitment to provide the vaccines at an agreed price.

Product (RED) is a scheme by which consumers purchase items branded Product (RED);
producers donate 50 percent of profits on that item to the Global Fund to fight HIV/AIDS. The
initiative was taken by the singer Bono in 2005 and has attracted multinational companies
such as Nike, Apple, American Express, Gap and Hallmark. Since its launch, (RED) has
generated over US$250 million for the Global Fund and over 40 million people have been
impacted by HIV and AIDS programs supported by (RED) purchases. See further
www.red.org

The Global Fund to Fight AIDS, Tuberculosis and Malaria was created in 2002 on the
initiative of the UN to dramatically increase resources for the fight against the three
pandemics. It spurs partnerships between government, civil society, the private sector and
communities living with the diseases. The Global Fund does not manage or implement
programs on the ground, relying instead on local experts.

Debt2Health agreements, under which the (official) creditor agrees to forgo payment of a
portion of interest and principal on the condition that the beneficiary invests an agreed amount
in health via the Global Fund. To date, four Debt2Health agreements have been concluded.
They involve Germany and Australia as creditor countries and Indonesia, Pakistan and Côte
d’Ivoire on the beneficiary side.

UNITAID, a French initiative, was founded specifically to channel resources into treatment
and care for those affected by HIV/AIDS, tuberculosis and malaria. UNITAID derives around
70 percent of its income from the international solidarity levy on air tickets. Since inception,
UNITAID reports that it has raised close to US$2 billion in resources to help provide
treatment for approximately 47 million people worldwide.

The Gobal Digital Solidarity Fund, an African initiative jointly with France was established
in 2003. under the Fund public institutions and private companies are urged to donate one
percent of the value of an information and communications technology (ICT)-related contract
to the Global Digital Solidarity Fund which is intended to reduce the digital divide between
developed and developing nations. Sweden is not a part of the Global Digital Fund.

The Clean Development Mechanism (CDM) allows a country with an emission-reduction or
emission limitation commitment under the Kyoto Protocol to implement emission-reduction
projects in developing countries. Such projects earn saleable certified emission reduction
(CER) credits, each equivalent to one ton of CO2, which count towards meeting Kyoto targets.
A two percent levy on carbon credits generated through the CDM is channeled in turn to the
Adaptation Fund which finances climate adaptation projects and programs in developing
countries that are parties to the Kyoto Protocol. As of 2011, the Adaptation Fund had funded
11 projects in developing countries totaling approximately US$70 million.

Caribbean Catastrophe Risk Insurance Facility (CCRIF)—the world’s first regional
insurance fund - was establishment in 2007. The CCRIF offers index-based insurance—
insurance under which payouts are based on an objective, local index (such as one tracking
earthquake data or hurricane wind speeds) that serves as a proxy for actual loss. Donors
provided start-up funds, and the World Bank later arranged a US$20 million reinsurance that
transferred a portion of risk to capital markets. By pooling their risk, the 16 member countries
have saved about 40 percent compared to premium costs had they negotiated individually on
commercial markets.
In addition to these specific projects, there is also a discussion in the literature of innovative finance of
a more generic form:
Local-currency bonds Development assistance in low-income countries has traditionally
been denominated in the currency of the donor country, which has risks for borrowers (for
example, currency fluctuations make it difficult to forecast debt burdens and plan for future
expenses) and can make potential investors wary. World Bank Group financing is helping to
build up capital markets in many low-income countries: from 2000 to 2008, for example, the
Bank Group committed the equivalent of more than US$5.7 billion in local currency financing
in 31 countries.
Diaspora bonds refer to a debt instrument issued by a country or a sovereign entity aiming to
raise funds through its overseas diaspora. India and Israel have been at the forefront of
diaspora bond initiatives and have raised over US$35-40 billion using these bonds.
As noticed above, there is a predominance of health-oriented mechanisms, both in terms of
design and of channel of funds for use. Over the last few years, a number of innovative
mechanisms have also emerged in climate and renewable energy. One reason for the former
could be that health-related issues feature high among the eight MDGs (being 3 of the 8
objectives), and that innovations in the health sector, such as vaccinations, tend to have global
consequences. Hence, the impact of a break-through can be very considerable. However,
another reason might be that one of the most dynamic new players in development assistance,
the Gates Foundation, has health as its first lead priority. Swedish aid has had a similar
orientation in innovative financing, not least through Sida’s association with the Gates
Foundation.
Another explanation for both health and energy sectors driving a growing number of
innovative mechanisms could be the public-private nature of these sectors. Both require the
participation of private capital and commercial players to build power plants and develop
vaccines. Both sectors also represent essential public goods and basic services necessary to
enable shared and sustainable economic growth.
Green Bonds
Green bond is versatile instrument of growing popularity. Green bonds are well-known in the
Swedish market among pension funds as well as municipalities, but to date have not been
included in Sida’s portfolio. Green bonds or sustainability bonds effectively provide
repayable capital for large infrastructure or other upfront costs. Bonds are issued in the capital
market, often to longer-term investors such as pension funds. Fixed-income securities from a
government-backed or AAA rated issuer represent no risk to investor. In some cases green
bonds have also been associated with tax breaks, such as the tax-exempt Green Bonds issued
by the Commonwealth of Massachusetts.
Green bond issuance is on the rise. Through September 2013, approximately US$3.7 billion
in green- or climate-labeled bonds were issued, an increase of more than 50 percent over the
US$2.43 billion sold in all of 2012. Approximately US$32 billion in MDB green bonds have
been issued to date, largely to fund climate change adaptation or mitigation projects. About
US$7.5 billion remains outstanding due to maturities.32
The primary issuers of green bonds have been multilateral development banks, such as the
World Bank, IFC, the European Investment Bank, and FMO. The World Bank issued its first
green-labeled bond in 2008. The security was created by the Bank in partnership with
SEBanken. This Swedish bank is the largest issuer of green bonds and has sold US$4.0 billion
to date.
Selected cases of Innovative financing projects
Below we present three international examples of innovative financing more in detail. In
selecting the cases, we looked for mechanisms that (i) have a potential for replication, (ii)
represent different instruments or combinations of instruments to illustrate the range of
possibilities, and (iii) are innovative in the sense that they are first of their kind in their sector
or specific use of instrument. We also made an effort to include sectors where Sida’s use of
innovative finance has been limited to date, specifically agriculture /SME and energy. The
three examples are:

The African Agricultural Capital Fund (AACF)

The Global Energy Transfer Feed-in Tariff (GET FiT)

The Green Africa Power (GAP) – a new subsidiary of the PIDG
African Agricultural Capital Fund (AACF)
Issue Addressed: To improve the livelihoods of smallholder farms in East Africa by
primarily investing in agricultural small and medium sized enterprises that provide improved
access to goods, services, quality employment opportunities and markets along agricultural
value chains. The Fund's impact investment philosophy is to have both a strong financial
return and significant social impact.
Fund Structure: The fund plans to invest in approximately 20 agricultural enterprises using
debt, quasi-equity and equity – with an emphasis on self-liquidating structures in light of the
limited liquidity and exit environments in the sector. Investment sizes will range from US$
200,000 to US$ 2,500,000.
AACF has a ten-year life, with an option to extend for an additional two years. It has
investment periods of up to five years with an investment hold of five to seven years.
Organisation
32
http://www.breckinridge.com/pdf/whitepapers/Green_Bonds.pdf
Pearl Capital Partners (PCP), a specialized African agricultural investment fund manager that
is based in Kampala, Uganda is the fund manager. PCP was the first and one of the few
private investment managers in sub-Saharan Africa focused exclusively on growing small and
medium-sized enterprises in the agriculture sector. It provides “hands-on” expertise into a
sector that has suffered from under-investment. PCP's model focuses on building the skills of
local management teams rather than infusing management expertise from abroad, making it a
sustainable approach to investing on the continent.
The limited partners, the Gates Foundation (US$10 million), the Gatsby Charitable
Foundation (US$5 million), and the Rockefeller Foundation (US$2 million) contributed $17
million and J.P. Morgan's Social Finance Unit made a $8 million senior, unsecured
commercial loan at a below market rate. USAID's Development Credit Authority is
guaranteeing 50% of the loan. USAID, under the Feed the Future initiative, also granted $1.5
million to fund to assist in improving investee companies' operations, competitiveness, and
access to markets.
Finance/Return: The targeted gross portfolio return is at least 15%. While potentially high
for agriculture projects, this is significantly below private equity funds operating in Africa in
the agriculture sector. The fund management fees are 2.5% with a 20% carried interest.
Risks:
The principal risk is that the Investment Manager will be unable to find companies and
projects that meet the financial and social impact objectives of the fund as well as becoming
profitable within a reasonable time horizon. Other risks included limited manpower, market
risks such as the demand for and the pricing of commodity products and costs of inputs, etc.
The time consuming nature of working with emerging companies necessitates skills and
manpower, which is a limited resource in the fund manager.
Innovative Features:
 The development of portfolio-level social impact targets of improving at the lives of
least 250,000 smallholder farmer households and helping them realize an increase of
US$80 in annual income within five years of an investment.
 Social return less than that of private equity investors operating in the market
 The use of the DCA guarantee to support a commercial unsecured loan to an
investment fund
 Focusing on early stage businesses where risk capital is needed and demonstrating that
high long term investment returns can be generated
 AACF has a unique hand-on focus, including establishing and maintaining a strong
relationship between the lnvestee Company and AACF, through the provision of
active and relevant business management expertise to improve business performance.
The Global Energy Transfer Feed-in Tariff (GET FiT)
Issues addressed: GET FiT is designed to leverage more private capital into renewable
energy generation projects by addressing the following key hurdles for private investments in
the sector: low feed-in tariffs for renewable energy, high perceived offtaker risks, and lack of
availability of long-term capital at affordable terms and conditions. The GET FiT Premium
Payment Mechanism is designed to make small-scale renewable energy generation projects
(between 1MW and 20MW in installed capacity) promoted under the Renewable Feed-In
Tariff (REFiT) system financially viable, thus enabling a large portfolio of projects to move to
financial close and into implementation.
The Structure: The GET FiT Program Uganda consists of three key instruments:
1. The GET FiT Premium Payment Mechanism. This is a results-based top-up on the
existing Ugandan feed-in-tariff scheme REFiT. Both REFiT and the PPM are provided
on a per-kWh-basis and are funded by Development Partners through KfW. GET FiT
funds tops up the existing feed-in-tariff with calculated over a 20-year project lifetime.
The payment is results-based in the sense that 50 percent is paid out at completion of
the plant, and the remaining 50 percent over the first five years of production. GET
FiT Premium Payments are additional payments per kWh, above and beyond the
regulated REFiT tariff levels as published by ERA. Payments will be availed on a
grant basis, following an open and transparent Request-for-Proposal process. All
projects that hold a valid development permit from by the Uganda Elecricity
Regulatory Authority (ERA) and that are sufficiently advanced in project preparation
(e.g. feasibility study concluded) are eligible to apply under a Request for Proposal
(RfP) procedure. Projects will have to demonstrate that they (i) are financially and
economically sustainable (including GET FiT support), (ii) are technically sound and
(iii) comply with IFC Performance Standards on Environmental and Social
Sustainability (2012). In addition, a comprehensive legal due diligence will be
performed. Bids received on the basis of the RfP are appraised by independent
qualified experts who make a financing recommendation to the GET FiT Investment
Committee. An Investment Committee with representatives from the donors and the
Government of Uganda makes the final decision regarding support from GET FiT.
Support under GET FiT is issued until funds are exhausted.
2. Guarantee Facility through the World Bank. The Government of Uganda has
requested the World Bank to explore the use of a Partial Risk Guarantee (PRG)
mechanism for projects benefiting from the REFiT. The PRG will be used to facilitate
the provision of short-term liquidity support (Letter of Credit from a commercial
bank). This will provide greater certainty over timely receipt of payments that are due
from the Ugandan energy utility company UETCL in line with the Power Purchase
Agreement (PPA).
3. Private Financing Mechanism. Deutsche Bank - as initiator of the GET FiT concept
- is working with international and local commercial banks to facilitate project
financing transactions. The terms and conditions reflects the improved risk profile of
projects supported by GET FiT premium top up and guarantee mechanisms as well as
the improved quality of business plan material following the review by the GET FiT
public facility experts. The set-up of a dedicated fund vehicle to finance GET FiT
projects only is not planned. There is no exclusivity for the Private Facility and private
developers are free to approach other financiers for debt and equity financing
Timeframe
GET FiT was launched in Uganda in May 2013. The Program aims to fast track a portfolio of
up to 15 small-scale renewable generation projects of a total of about 125 MW within the next
3-5 years. GET FiT is a pilot program and if successful, it the intention is to scale it also to
other countries. This will help to add much-needed clean generation capacity, help to
strengthen regional grids and result in emissions reductions of 11 million tons of CO2
After the first round, eight private renewable energy projects have been selected, which will
add 78 MW or 482 GWh/ annually to the Ugandan grid within the next two years. After the
conclusion of the on-going second round, it is expected to facilitate further private investment
summing up to US$ 400m for the envisaged total of 150 MW.
Partners: GET Fit was developed by KfW in partnership with Deutsche Bank and is
sponsored by the World Bank, the Government of Norway, Germany, and by DFID. The EU
is considering additional support. The Premium Payment Mechanism is funded by Germany,
UK and Norway. Funding goes to KfW and then directly to private developers through a
Request for Proposal (RfP) process. The RfP process qualifies for Premium payments and
selected developers are invited to apply for World Bank PRG Guarantees and Deutsche Bank
financing as needed.
Finance: Norway has contributed EUR 17 million, the United Kingdom EUR 23 million and
Germany EUR 15 million to the Premium that is provided as a grant. Return on investments
for project developers are not yet accrued, but all projects must demonstrate financial viability
(including the top-up) to qualify.
Risk and Risk mitigation
The main risk would be lack of proposals from private developers. The first Requests for
Proposals have already mobilized significant interest. Other risks would be related to income
base of developers, either the base payment from the Ugandan utility, or the ability of project
developers to attract necessary capital. The programme is designed to reduce risk for private
developers and is tied to a strong commitment from the Government of Uganda, both through
the national feed-in-tariff and through its official request for World Bank PRG Guarantees.
PRGs count 20 percent against a country’s IDA allocation hence puts a strain on other lending
and constitutes a strong incentive for national utilities not to default. The Standardized PPA
under the GET FiT program has been published by UETCL after approval through the
relevant authorities. By streamlining the power purchase agreements, transaction costs for
developers under the REFiT are significantly reduced, offtaker and regulatory risk mitigated
and, private investment incentivized.
Innovative features
GET FiT can be considered innovative both in terms of leveraging funding from private
developers, and in tying funding to results. The programme combines three instruments to
address the totality of risks that typically prevent small-scale renewable energy projects from
happening.
Green Africa Power (GAP), a new PIDG initiative
Issue addressed: More than 700 million inhabitants of Sub-Saharan Africa lack access to
electricity. There is a shortage of all power generation projects in Africa, but particularly
renewable energy projects. Pronounced market failures inhibiting the growth of renewables in
the region are i) lack of cost reflective tariffs; ii) high upfront costs that make projects less
easy to finance, particularly when only short-term loans are available from local banks, and
iii) specific risks e.g. of construction delays and off-taker payment default, deterring potential
financiers.
Objective: Encourage renewable energy generation projects in Africa. It aims to address the
barriers by:
 reducing the upfront cost of capital, while maintaining overall commercial returns;

providing cover for specific construction phase risks; and

policy dialogue to move towards cost reflective tariffs.
Structure and Instruments: GAP will deploy two financial instruments and one policy
instrument, each of which will be individually negotiated and tailored to fit the specific
circumstances of the project.
1. Quasi Capital: A tranche of long term capital which, in the event of insolvency,
will rank junior to all other senior and mezzanine loans but above equity. It would
have the key characteristic that a minimum coupon would be paid as soon as
Financing Agreements with other lenders allow but the remainder of the coupon
(to achieve an overall reasonable return on capital established on a project by
project basis) and the capital repayment, would not be paid until a threshold IRR
had been achieved by equity participants. If the project generates cash flows in line
with expectations (see paragraph 3. below) then the effect of these terms would be
to “back-end load” the cash flows received by GAP beyond the first few years of
the project.
2. Contingent Line of Credit: A guarantee that provides additional comfort to lenders
on top of the debt service reserve account, to be drawn down in case of delays or
cost overruns in construction.
3. Policy Dialogue: GAP will encourage host countries to move towards costreflective tariffs, providing them with support to do so and buying them time to
build political and public support for tariff increases. The offtaker and its
government sponsors and regulators might agree a power purchase agreement
(‘PPA’) with a graduated rise in tariffs to the level required for the project to be
viable, with the low GAP return enabling the project to achieve financial viability
in early years. The additional cashflow in the later part of the PPA period would
allow GAP support to be repaid and a reasonable return delivered, while allowing
the developer to make a fair equity return, and supporting on commercial terms a
conventional loan.
Organisation: GAP is structured like the other PIDG project-financing Facilities, as an
autonomous legal entity managed under a contract with a private fund Management
Company. They expect to structure a diversified portfolio of economic scale renewable
energy projects in the US$ 20-50 million range.
Dfid has committed £98 million to fund GAP through the PIDG Trust. Norway funded the
feasibility work and is now in an advanced stage of considering an additional investment into
GAP.
Status: During 2013, the GAP Board, supported by an Executive Director has made
substantial progress in setting up the corporate and management structure of the new Facility.
Additional Board members were appointed to provide a balance of financial and technical and
African backgrounds. At yearend, the Board had shortlisted four candidates. Selection is
expected in the first half of 2014 with the fund being operational shortly afterwards.
Risk and Risk Mitigation:
The principal risk is that the Investment Manager will be unable to find companies and
projects that meet the objectives of the fund and at the same time be profitable within a
reasonable time horizon. The Board has identified, and has requested from candidate fund
managers, is a pipeline of candidate projects.
Innovation Features:
 Focus on developing projects and improving the enabling environment for renewable
projects.
 The form of financing provided is for early stage development costs and which is not
available in the private market.
Innovative DFIs and Development Banks – three examples
Some institutions have demonstrated ability to work innovatively on an organisational level.
They are included in this review to demonstrate the value of a culture of innovation, where
flexibility and versatility generates mechanisms that are not designed to be innovative as such,
but that are able to find ways to address important obstacles, and to deploy new instruments or
combinations of instruments effectively.
One development bank and two DFIs are described in some detail to make this point: German
KfW, Norwegian Norfund, and Dutch FMO. DFIs have pioneered a number of innovative
approaches. From this, it could appear that DFIs are more innovative than their national
traditional aid siblings. One explanation could be that DFIs already exist at the intersection
between aid and markets, hence are familiar with both worlds. Also, they often have a more
flexible mandate with less instructions on activities, sectors, and disbursements from their
owners. Finally, DFIs typically dispose a broad range of instruments from grants and soft
loans to market term financing and guarantees
FMO
FMO, the Dutch DFI established in 1970, is a public-private partnership, with 51 percent of
the shares held by the Dutch Government, and 49 percent held by commercial banks, trade
unions, and various private sector actors. This shared ownership gives FMO a stronger
commercial profile than Norfund and Swedfund among others. FMO can raise capital and
issue bonds in the capital market. FMO has a AAA rating with Fitch Ratings and AA+ from
Standard and Poor’s.33 FMO is able to offer the full range of financial instruments. In its
equity investments, FMO can also lower credit risk and accept a lower return in investments
33
FMO website: www.fmo.nl/about-us/profile
that take steps to improve Environment, Social and Governance aspects (ESG). This is a
useful approach to stimulate ESG work while maintaining ESG as a core responsibility in
company management.
Innovative financing is high on the agenda at the FMO and it is one of the main pillars in their
overall Theory of Change strategy.34 FMO does not operate with a single definition of
innovative finance, but has integrated innovation in its approach to “tailoring the financial
package to fit”. FMO is also discussing how to report on innovative financing. More
systematic reporting and documentation could facilitate replication of innovative instruments
across operations and sectors. FMO both develops its own instruments and supports others.
Examples of innovative financing include:



FMO developed the TCX, which later spun out to be its own entity. TCX hedges the
currency and interest rate mismatch that is created in cross-border investments
between international investors and local market participants in frontier and less liquid
emerging markets.35
FMO also initiated MFX solutions, which provide local currency hedging and
advisory support. MFX is a socially-oriented company that supports lending to
entrepreneurs in low-income countries with affordable hedging products and risk
management education.36
FMO issues sustainability bonds and green bonds. Bonds are issued to raise funds in
the capital market for renewable energy and inclusive finance (typically microfinance
through intermediaries). These bonds enable FMO to raise funds in the commercial
market while investors take no credit risk. Investors in FMO sustainability bonds
include pension funds, insurance companies and banks.37
FMO currently provides higher disbursements (gross) then the aid agency, DGIS, and is as
such unique in the international aid architecture.
KfW
KfW Development Bank is the development bank branch of German Kreditanstalt fuer
Wiederaufbau. It provides grants, soft loans, and loans and near-market conditions in
developing and emerging economies. KfW combines ODA funds from the federal budget
with KfW funds raised in the capital market bond offerings. Grants or loans on IDA terms are
drawn from budget funds while development loans typically blend budget funds and loans.
Their main sector priorities include small and medium-sized businesses (SME), environment
and climate protection, and health and social infrastructure.
Its combination of grant resources and KfW funds raised in the market with AAA rating
provides flexibility to both (i) meet different country needs and (ii) to package blended
financing structures.
34
Interview with Mr Huib-Jan de Reuijter, Director of Finance
35
36
https://www.tcxfund.com/
http://mfxsolutions.com/
37
http://www.fmo.nl/k/news/view/13829/179/fmo-issues-eur-500-mln-5-year-sustainability-bond.html
In the health and education sectors, KfW has extensive experience with voucher models that
use market mechanisms to stimulate results in public services.

In the education sector:
o A project in Ghana provides vouchers for vocational training to SMEs. SMEs
can pick training providers from a pool of accredited training institutes –
public or private. Accreditation is provided by local business councils and is
subject to adherence to established standards and curriculum.
o KfW has pooled resources with Equity Bank Group, the MasterCard
Foundation, USAID, and UKAid in the Equity Group Foundation. Through its
“Wings to Fly” programme, the foundation provides scholarships for high
achieving students from needy families to continue schooling into secondary
school. KfW is also supporting and exploring financing models to enable
poorer students to access tertiary education, exploring student financing
possibilities in partnership with universities

In the health sector:
o KfW has a number of projects providing maternal health services. In the
Reproductive Healthcare Voucher Project (RHVP) in Uganda, poor women
received vouchers for package of birthing services at clinics, services supplied
by skilled medical practitioners. It also provided subsidized vouchers to
couples for HIV/AIDS and other sexually transmitted diseases. For a small copay, beneficiaries can choose services from a list of accredited health
providers. Accredited institutions benefit from training and technical support.
In addition, proceeds from the vouchers when exchanged exceed the actual
service cost and can be used to upgrade clinics. The system was developed by
KfW in Uganda and is now funded by other donors, including GPOBA. It was
awarded the IFC Smart Lessons award in 2012, and has also been rolled out in
Kenya. Lessons from the program are summarized here:
http://www.gpoba.org/sites/gpoba/files/SmartLessons_RHVP.pdf. A total of
137,964 vouchers were sold, including 106 306 Safe Delivery vouchers and
31, 658 STD vouchers. Vouchers were introduced for the first time in a
healthcare context in the World Bank's Africa region.
o In health, approaches to universal health care insurance are being explored. A
programme functioning with the National Health Insurance Fund in Tanzania
to include poor mothers and newborn children as beneficiaries and one project
is currently piloted in Kenya.
Through partnerships on both sides of the public-private continuum, KfW also has unique and
very successful experiences with structured funds. Structured funds enable packaging
different sources of funding and risk level. Structured funds combine senior level tranches
from commercial lenders, mezzanine tranches provided by development banks, and junior
tranches by donors. The junior tranche would be the first to be drawn on in the event of a
default and effectively serves as a risk cushion for the mezzanine and senior tranches of the
fund.
Loans are issued to local commercial bank that constitute efficient intermediaries for Small
and Medium sized enterprises (SME) or municipalities. These longer credit lines allow
smaller and often local partners to introduce new products, access new client groups, and
enter new markets.
The Green Growth Fund is a case in point. Launched in 2009, the GGF is a structured fund
with different risk tranches. The financial institutions KfW, EIB, EBRD, and IFC each
participated with 25 million Euros in the so-called senior and mezzanine tranche of the fund.
The EU Commission and BMZ are is participating in a junior tranche with contributions of
38.6 million and 8 million Euros respectively.
Within KfW, efforts are made to systematically share experiences and scale up innovative
approaches across sectors. Competence centers are in charge of this, and the Competence
center on finance has been responsible for designing and advising on approaches to innovative
financing in KfW.
Norfund
Norfund is the Norwegian Development Finance Institution. Norfund is 100% owned by the
Norwegian Government. Its capital base is replenished annually from the ODA budget.
Norfund provides loans and equity to businesses in developing economies. Norfund’s
financing is on commercial terms but they have no specific revenue or return targets. They
invest with a long perspective (typically ten years) and often provide equity. Loan or equity
financing is accompanied by extensive technical assistance and technical as well as financial
expertise.
Norfund’s largest investment sector is renewable energy, which represents about half of its
portfolio. The remaining portfolio is divided in agriculture, financial institutions, and private
equity funds for SMEs. In the last few years, Norfund has expanded its investment in three
distinctive areas that have required developing innovative approaches and strategic alliances.
First, Norfund has scaled up investment activity in fragile states. In 2013, Norfund issued a
US$ 2 million loan to Proximity Design in Myanmar, a microfinance institution primarily
lending to small farmers. Norfund is also involved in a major hydropower plant in Fula
Rapids, South Sudan. In the latter, Norfund works closely with the Norwegian Development
Agency (Norad) in order to ensure complementarity of funds and competences. Norfund has
taken on the project developer role in addition to being an investor, while Norad has provided
extensive grant funding for feasibility studies and technical assistance on the Government
side. Working in fragile states, Norfund has mobilized or committed significant resources for
business case development and technical assistance, both in partnership with Norad and
through its own small Grant Facility. With the ability to balance risk across its portfolio,
Norfund id also able to take high political risk alongside less risky investments in other
countries and sectors.
Second, Norfund is increasingly leveraging private capital for co-investments. In 2012,
Norfund signed an agreement with the Norwegian pension fund KLP whereby KLP
committed to invest US$ 80 million over five years in renewable energy and finance in
developing and emerging economies. These investments, while typically not in the Least
Developed Countries (LDC) and fragile states, they are limited to developing countries in the
Norfund portfolio. Hence, they expand the geographical presence of KLP significantly. In
2013 KLP joined Norfund in investing in a solar park in South Africa. Through this
arrangement, KLP provides much needed long-term capital while piggybacking on the
technical expertise, local knowledge, and sustainability standards of Norfund.
Third, Norfund has pioneered joint ventures with industry in the energy sector. Norfund has
pioneered innovative approaches to its investments in renewable energy across a number of
projects. SN Power was established in 2002 as a joint venture between Norfund and the
leading Norwegian power company Statkraft. SN Power is Norfund’s largest investment and
invests equity in hydropower in emerging markets. In 2009, Agua Imara was established as a
subsidiary of SN Power, co-owned by Norfund, Statkraft, and two regional power companies.
Agua Imara’s mission has been to focus on hydropower development in Africa and Central
America. In May 2013, it was announced that the two companies would be restructured.
Norfund would take a higher stake in the Africa and Central America portfolio and Statkraft
would gradually take over the less risky portfolio in Asia. The restructuring reflects Norfund’s
overall strategy to be a first mover and phase out its investment as other and more commercial
investors take a stronger interest. In addition to loan and equity, Norfund has a small grant
facility that can be used to pioneer new approaches and business models, inter alia in
inclusive finance.
ANNEX 4: A COMPARISON BETWEEN THE CONCESSIONARY
CREDITS AND THE CURRENT LOANS AND GUARANTEES
Countries of investments
Tying status
Type of financing
Lender
Loan/guarantee
connection
Currency of loan
Sector/theme
Borrowers/guarantees
Risk assessment
Administration of
guarantee reserve
Stakeholders in Sweden
Concessionary credits
Seldom countries where Sweden
had country strategies (strict
creditworthiness criteria)
Tied
Contract financing
Swedish bank (with Sida
guarantee)
Guarantee always linked to CC
SEK or US$
Infrastructure, mainly energy and
telecoms
Governments, public utility
companies
Sida on the advice of Swedish
Exports Guarantee Board (EKN)
EKN
ABB, Ericsson, other equipment
suppliers and contractors
35 – 80 % of a combined CCs
(Loans and) freestanding guarantees since 2009
Country strategy countries, multi-country banks and
funds
Untied
Project financing
Any lender, Swedish, international, national
Guarantee provided independent of provision of
loans
Any foreign or local currency
Any sector/theme (Health, agriculture, water, SMEs
most common up till now
Commercial banks, non-bank financial institutions,
trust funds
Sida on the advice of EKN, Swedish National Debt
Board or outside expertise
EKN
No Swedish stakeholder needed
Administration costs
Co-financing
Not charged by Sida
Normally not. Occasionally
parallel financing with IFIs
Collaboration with
Swedish embassies
Limited. Not needed as there
were separate budget allocation
for CC
ADB
Non-existent
Infrequent
Up to 80 % in the total financing. A grant may be
provided up front while the credits be given later
Chargeable by Sida
First loss guarantees, partial risk guarantees,
advance market mechanisms, reinsurance, frontloaded guarantees, disaster guarantees co-financed
with IFIs, DFI, commercial investors, patient
investors, charitable funds etc in any form
Increasing specially since 2014 as there is no
separate budget allocation but funds have to be
taken from country allocations
With USAID, ADB, Gates Foundation
Frequent
Normally
Limited
None
None
Often substantial
Substantial
Substantial
Grant elements
Strategic partnerships
Collaboration with DFIs
Guarantee premium
subsidy
Additionality
Catalytic effect
Scaling up and
replicability
ANNEX 5: DEVELOPMENT OF LOCAL CAPITAL MARKETS
Sida has a long history supporting local capital market development. Sida organized and
supported the first corporate bond issue in Uganda in 1999 in collaboration with the borrower,
MTN Uganda, and its principal owners, MTN (South Africa) and Telia Overseas. It was a
pioneering transaction as there was no long-term debt market. Even the market for
government bonds was highly limited and illiquid. Sida provided a partial credit guaranteed of
the issue of Uganda shilling denominated floating rate notes, which were mainly taken up by
local institutional investors such as National Social Security Fund. Sida´s guarantee for 80
MSEK covered 90 % of the nominal value of the notes but no interest. Partly linked to the
bond issue was Sida support (jointly with GIZ) to the budding capital market´s regulatory
framework and to its main institutions, the Capital Market Authority and the Uganda
Securities Exchange.
The focus on local capital markets has continued. Sida has worked with IFC to develop wellfunctioning securities markets in Africa within the Efficient Securities Markets Institutional
Development (ESMID) program. The initial focus was on East Africa (Kenya, Rwanda,
Tanzania and Uganda) and Nigeria. The program has recently spread to other regions
including regions outside Africa. The program provides legal and regulatory assistance,
development of secondary markets and improved market infrastructure, capacity building and
financial and advisory support for bond issuance on local capital markets.
As noted in the main text, a Sida initiative, GuarantCo, has its local currency guarantee
mandate. GuarantCo has now participated in several partial risk guarantee transactions that
have included local bond issues, including a shariah bond offering. In some cases, they have
partnered with DFIs such as FMO, IFC and DEG (the German DFI). A few GuarantCo capital
markets transactions in Sub-Saharan Africa are worth mentioning: ALAF, a steel plant in
Tanzania; Spencon, an East African construction company; and Kaluworks, an aluminium
roofing manufacturer in Kenya. Sida does not have any direct involvement in any of these
transactions. It is noteworthy that GuarantCo has been successful in acting on its mandate
namely to act as a developer in capital markets, as Sida had originally envisioned. Looking
forward, there are opportunities for Sida to use its guarantee instrument to co-guarantee with
GuarantCo, rather than participate in GuarantCo as an investor only.
It is surprising that Sida’s interest in playing an active role in the development of instruments
suitable for long-term bond markets and in actual transactions has been dormant. The flexible
guarantee facility seems to be an ideal tool for this purpose.