Thinkwell innovative financing

Putting the innovation back into innovative financing for health

27 July 2020

This week, ThinkWell is thrilled to complete a three-month review of 42 major innovative financing initiatives that focus on Sustainable Development Goal (SDG) 3—health and well-being.

The aim of the review[1]  is that its recommendations are picked up by the G20, its health and finance ministers, donors, development finance institutions (DFIs), investors and bankers to not only scale up proven approaches, but also to take more risks.

Here we reflect on some of the findings and summarize three ways innovative financing for health could be made more innovative, ultimately crowding in new funding, especially from the private sector.

However, before we lay out these reflections, it is critical to grasp the importance of innovative financing for SDG 3. The annual funding gap to achieve SDG 3 for low- and middle-income countries (LMIC) is currently estimated at a startling US$371 billion. This is likely to increase due to the COVID-19 pandemic, which has created financial needs for research and development, supply chain distribution, equitable access to essential medicine, and significant barriers to reach related goals like SDG 2, just to name a few.

Establishing a Common Understanding

Innovative financing as both a term and a concept can be challenging to pin down because it is often used liberally to explain several related financing approaches. However, the most common use of the term refers to all nontraditional financing mechanisms which are used to efficiently raise and deploy new funds for development aid. Related, blended finance is defined as an approach for leveraging additional resources by combining finance from different sources – especially private and public – with varying risk tolerance.

Of course, innovative financing is not new, but it is evolving.

Catalytic funding initiatives have been successfully pooling resources from traditional and non-traditional funders since the early 2000s. Development impact bonds – first developed in 2011 – have recently started to achieve success in tapping private capital to finance the needs of the sector, while impact investing has grown steadily over the last ten years to respond to challenges within health. More recently, there has been the first-ever SDG index-linked bond that was launched by the World Bank in 2017 for retail investors. This latter initiative has tremendous potential to increase funds for SDG 3 via socially responsible investing (SRI) moving forward.

Defining the Analytical Framework

Current innovative financing and approaches range across the spectrum of capital. They can be from zero to little cost recovery achieved by results-based financing mechanisms, break even and moderate cost recovery often achieved by catalytic financing mechanisms, through to full recovery with interest often achieved via impact investing and SRI (Figure 1). But how do we improve and take forward more innovation in financing health?

innovative finance for health

Three Strategies to Foster More Innovation in Financing SDG 3

  1. For innovative financing initiatives to work better, they must be designed to be fully compatible with local health markets.

The maturity of local health markets must be considered by donors and DFIs during design, and the objectives set appropriately. Each innovative finance mechanism plays a unique role in the finance ecosystem and across the spectrum of capital flows. For example, if feasibility studies show that a market-based innovative financing solution may be viable, impact investing and SRI should be considered. In contexts with chronic market failures, donors may look to deploy more results-based and catalytic innovative financing.

Throughout, donors should use their funding to take mitigate and/or take more risks. For example, donors could help fund the design of more debt financing funds to help finance small and medium enterprises working in health for Sub-Saharan Africa. The Medical Credit Fund is one of the few in existence, and yet the demand for this kind of financing is high.

  1. Actionable information unlocks private sector investment and improves impact. For this, alignment of metrics across all mechanisms is needed.

Capital flows to address SDG 3 (and related SDGs like SDG 2) are too often inhibited due to information failures that arise from several dimensions, notably a lack of meaningful metrics that investors and donors can rely on to meet their objectives and fiduciary responsibilities. Further work is required to ensure innovative investment mechanisms in health are using common outcome-level indicators. In terms of financial indicators, much more needs to be done to improve information flow, metrics, and benchmarks for investments to target SDG 3.

  1. ODA should unlock new sources of funding and not displace or discourage natural flows of domestic or external resources.

Many of our key informant interviewees referred to the need to “crowd in” private financing. Equally important is the need to ensure ODA and concessional capital do not “crowd out” existing financing or private sector investments. While DFIs and donors usually conduct due diligence processes to ensure their funding is complementary, actual investment performance data held by DFIs and multilateral banks (MDBs) remain proprietary. Private investors are not able to access the same default and return rates experienced by DFIs, and as a result the private sector may be less likely to invest in frontier markets because they cannot compete against DFIs. There should be accelerated efforts by DFIs and MDBs to clarify their investment performance. This transparency will improve investor understanding and help bring in new private sector financing.

In conclusion, we need to make innovative financing more innovative moving forward. This is critical to deliver the 2030 Agenda for Sustainable Development. The Covid-19 pandemic has accelerated the need for a bigger, better toolbox to effectively finance health systems and determinants of health. We must, as a development community, build on the many successes of innovative financing to date while not resting our laurels and improving our approaches.

[1] The full review will be published this summer by our European client.

Written by Greg S. Garrett and Meera Chakravarthy. Photo by Greg S. Garrett.

Greg S. Garrett (Director, Strategy and Design) is a senior development professional who has worked on policy and financing to improve health and food systems for the past 17 years. Before joining ThinkWell in 2019, Greg worked at the Global Alliance for Improved Nutrition (GAIN) as Director of Policy & Finance and Head of GAIN Switzerland. During this time, he supported food system change in over 30 countries by forging private public partnerships, established GAIN’s Innovative Finance Program, directed a credit revolving fund for African businesses, and led GAIN’s largest portfolio — food fortification — helping 12 countries enact legislation and reach hundreds of millions with better nutrition. Greg holds a BA and an MSc in international development from the University of Bath, UK.

Meera Chakravarthy, (Analyst) works at the intersection of creativity and business. She has a background in strategy consulting and design with a specific interest in how culture plays a role in development. Prior to joining ThinkWell, Meera was a senior analyst at Accenture Federal Services and also spent some time working at a consulting firm that specialized in philanthropies. She has worked with a range of government, foundation, and nonprofit clients, helping develop policy and technology strategy, analytics, and executing business process re- engineering. She has also been involved in corporate social responsibility efforts across her various roles. Meera holds bachelor’s degrees in both music and economics from the University of North Carolina at Chapel Hill.