The Road Ahead

This book is neither the last nor the definitive word on innovative finance. Instead, it is meant to introduce the subject as a way to consider our individual and collective roles in financing the public good and in developing market solutions to market failures. The omissions are many, but they are fertile ground for the next generation of innovative finance solutions. This is particularly true as we think about the two major areas of investment required for our future prosperity: education and infrastructure....

Financing the Future: The Lessons of Innovative Finance and the TIES That Bind

A globalized world means that the challenges we face are not confined to any one geography or sector; nor must be the solutions. Local carbon emissions produce global warming. Epidemics spread with rapid and cruel caprice. Conflict drives people over fences and oceans in search of sanctuary. Poverty exacerbates all of these problems, and investing in its alleviation is the paramount public good. Accordingly, innovative finance allows and encourages integrative, borderless thinking that makes critical linkages and investments across issues and regions: poverty and environmental degradation, public health and global warming, humanitarian disasters and long-term resilience, and community development that is both place- and people-centric. That is why, when it comes to finance, innovation is not so much about a new product or service as it is about creative application in different circumstances: an expert in securitization who translates future development aid pledges into vaccines today; an entrepreneur who turns a mobile phone into pay-as-you-go solar electricity; the conversion of pay-for-success contracts from bridges and roads to affordable housing, early childhood education, and maternal health. This adaptive approach—the ability to think beyond bounds, to overcome market failure in one context with market solutions from another—is a hallmark of innovative finance....

Health

Looks at the range of innovations that have emerged in recent years to improve financing for global health objectives, and examines various approaches, including global levies like UNITAID and UNITLIFE; an array of market shaping initiatives like prizes and challenges and the GAVI Alliance’s advanced market commitments; a variety of innovations related to debt, including loan forgiveness and ‘debt swaps’ administered through the Global Fund, Pledge Guarantee for Health, the International Finance Facility for Immunization (IFFIm)’s vaccine bonds; and equity investments—impact investment vehicles like the Global Health Investment Fund—that blend philanthropic and commercial capital for drug research and development and other health interventions.

Innovative Finance in Communities Across the United States

examine whether some of the place-based investment strategies, like the Community Reinvestment Act and the Low Income Housing Tax Credit—which have unlocked billions of dollars in private capital for real estate, affordable housing and enterprise development—lend themselves to more people-centric services. We look at innovations in financial inclusion and asset building, approaches intended to create wealth for the poor, often by simply connecting them to resources they are already eligible for, like the Earned Income Tax Credit. We also investigate the U.S. experience with social impact bonds (SIBs), pay-for-success contracts between local government, nonprofit service providers, and private investors whose capital underwrites preventive services. The idea is that if the interventions succeed, the investors will be repaid out of the social savings. The SIB industry is still new in the US and the track record is mixed. However, the larger lessons about good governance, evidence-based policy-making, and blended capital are relevant for innovative finance in U.S. communities for a growing set of capital investments that fuse the place and people lenses. Like development projects that link affordable housing with community health centers. In this paradigm, mobility is critical to economic opportunity, and investments in physical and social infrastructure are mutually reinforcing.

Financial Inclusion and Access to Capital

Shows why access to capital and financial services are vital components of the development agenda: a way for families to climb out of poverty and for small- and medium-sized enterprises (SME) to provide goods, services, and employment in regions of the world that lack these. The chapter traces the evolution of microfinance from its nonprofit origins to a fully commercialized industry, and from a field built primary around credit to one that has begun to offer a wider variety of financial services, including savings and insurance. We use IFMR Trust, an Indian microfinance company, to illustrate these innovations.

Toward a New Disaster Finance

Looks at complex manmade disasters—thornier, in some ways, than natural disasters because they do not readily lend themselves to risk transfer. Displacement and dislocation—refugees fleeing conflict—are political failures, not market failures. Nevertheless, this chapter looks at whether there are ways to improve how donor funds are raised and spent in humanitarian relief, particularly as protracted human emergencies become long-term development challenges. The chapter’s concluding observations, with examples from investment for peace initiatives in the Middle East, return us to the original Bretton Woods theme: that economic development and political stability are necessarily intertwined.

REDD Forests, Green Bonds, and the Price of Carbon

Climate change is not only among the most urgent problems covered, but is inherently interconnected with every other social and economic challenge that this book addresses. This chapter investigates the power of price signals when it comes to pollution and architecture and power of tradable emission schemes. It then examines two examples of innovation in climate finance that have evolved in spite of the delay in the development of a global market for carbon. REDD—Reduction in Emissions from Deforestation and Forest Degradation—shows the potential of pay-for-success partnerships to reduce the destruction of rainforests and carbon emissions, though still in need of scale. In contrast green bonds have experienced tremendous growth, but lack any tight green definitions, a quantity-versus-quality conundrum we revisit throughout the book.

Innovative Finance and the Visible Hand

As Christopher (“Edge”) Egerton-Warburton pedaled his bike along the Buckingham Palace Road in the summer of 2002, the gears began to shift. A Goldman Sachs banker by trade, Edge considered the investment challenge—and conundrum—posed to him by the Chancellor of the Exchequer: how to help the United Kingdom honor its commitment to the Millennium Development Goals (MDGs), an ambitious and global effort to tackle poverty and its many dimensions—among them hunger, child and maternal health, preventable disease, and education. Why, Edge wondered, if investments in social and economic development were so cost effective, did we fail to make them? And was it possible to borrow from his world of structured finance to turn future government aid pledges into money for social investment today—when it was most valuable?...