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Innovative Financing for Development

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"We will not achieve the Millennium Development Goals without new resources. We are all aware of our respective nations’ budgetary constraints. That’s why, here at this UN forum, I am issuing a call for innovative financing. It would give our organizations the resources to effectively fight diseases — HIV-AIDS, malaria etc. Now we must take the next step, which I propose: establishing a financial transaction tax, to which several European countries have already agreed, so that capital movements can be reined in or, if they are not, can – through this tax – finance development and fight threats to public health. France has created such a tax. France has even made another commitment: to earmark at least 10% of this tax for development and for fighting public health threats and pandemics."

François Hollande, President of the French Republic,
Opening debate of the 67th session of the General Assembly, United Nations, New York, 25 September 2012

1. Innovative financing at the United Nations

A. Latest developments in New York with respect to innovative financing

July 2012: A round table specifically devoted to exploring innovative sources of financing for development to facilitate the mobilization of national and international resources for development will take place on the sidelines of the annual substantive session of the Economic and Social Council.

From 7 to 8 December 2011, the General Assembly held the 5th High-level Dialogue on Financing for Development, in accordance with the recommendations of General Assembly resolution 65/314.

The States agreed on the necessary reform of the international financial and monetary system, on the importance of the private sector and trilateral cooperation for development and on the fundamental need to ensure that innovative financing is complementary to Official Development Assistance.

The participants seized this opportunity to stress the importance of improved coordination of the various positions with other international forums such as the G20.

In his speech at the plenary session, France’s representative underscored that even though Official Development Assistance was an important catalyst for development, France also promoted assistance mechanisms adapted to changes, as well as inclusive development, mobilizing all resources of the countries. In light of this, innovative financing for development, which has generated $6 billion since 2006, should complement existing resources.

On 13 October 2011, within the framework of the 66th session of the General Assembly, the Second Committee examined “the implementation of the Monterrey Consensus and the recommendations of the Doha Follow-up Conference on Financing for Development,” in accordance with the recommendations of resolution 65/146.

After noting the impact of the international economic crisis on the donor country commitment, the participants underlined the importance of innovative financing as an essential complement to traditional Official Development Assistance. France reaffirmed its support for the idea of further promoting innovative financing for development, notably through the creation of a tax on financial transactions.

On 1 September 2011, in preparation for the 66th General Assembly relating to the follow-up to and the implementation of the Monterrey Consensus and the Doha Declaration on financing for development, the UN Secretary-General published his report on the "Innovative mechanisms of financing for development."

This report examines the scope and scale of innovative mechanisms of financing and reviews their potential as well as their contribution to achieving the Millennium Development Goals, in follow-up to the commitment made by the UN at the International Conferences on Financing for Development in 2002 and 2008.

B. Action by the United Nations

“Innovative financing” was first introduced into international debates in 2002 through the Monterrey Consensus (paragraph 44 states that it is “important to find innovative sources of financing”), in order to generate resources that are complementary to Official Development Assistance and to ensure greater stability.

In 2004, the UNSC launched, alongside Brazil, Chile, France and Spain, an initiative aimed at fighting hunger and poverty (commonly referred to as the Quadripartite Group) which led to the adoption of the New York Declaration of 20 September 2004 which recognized the need “to give further attention to innovative mechanisms of financing in order to raise funds urgently needed to help meet the MDGs.”

Within the United Nations Department of Economic and Social Affairs (DESA), the Financing for Development Office (FFDO) is responsible for the follow-up to the Monterrey Conference as well as efforts to promote innovative mechanisms for financing for development. The FFDO, in collaboration with experts from the public and private sector, the academic community and civil society, aims to keep member States informed and enable them to uphold the commitments they made within the framework of the Monterrey Consensus.

Since then, the topic has been mentioned in all resolutions relating to financing for development adopted by the UN General Assembly.

On 19 February 2008, UN Secretary-General, Ban Ki-moon, who has made the quest for innovative financing mechanisms a UN priority, appointed Philippe Douste-Blazy as UN Under-Secretary-General and Special Advisor on Innovative Financing, tasked with promoting new sources of financing with a view toward implementing the MDGs.

The final declaration of the Doha Review Conference (December 2008) also mentions innovative financing (paragraph 51) by welcoming “the considerable progress made since the Monterrey Conference in voluntary innovative sources of finance and innovative programs linked to them,” and by encouraging “the scaling up and the implementation of innovative sources of finance initiatives.”

On 20 December 2010, the General Assembly adopted the first resolution specifically devoted to “Innovative mechanisms of financing for development” (A/RES/65/146) in which it reaffirms that “innovative sources of financing can contribute to the achievement of the internationally agreed development goals, including the Millennium Development Goals.”

In January 2012, the Secretary-General reaffirmed the importance of implementing innovative mechanisms for development, which he identified as a priority during the presentation of the program for his second term of office.

The 10th plenary session of the Leading Group on Innovative Financing for Development (held in Madrid on 27 February 2012) provided another opportunity to reaffirm this priority of Mr. Ban Ki-moon’s term of office through Alex Trepelkov, Director of the UN Department of Economic and Social Affairs.

2. Innovative financing

A. Origin

The notion of innovative financing for development responds to a set of analyses drawing the attention of the international community to the need for a complimentary source of aid, and proposes several measures (taxes levied on activities that have benefited most from globalization and that have an environmental focus, guarantee mechanisms, market-based mechanisms, private sector contributions, etc.) in order to respond more effectively to the requirements related to the financing of international solidarity for the 21st century.

B. Features

Features of innovative financing:

— Predictability and stability of financing in order to meet long-term requirements

— Financing mechanisms should be complementary to traditional ODA

— Model based on collective management of new resources developed jointly through North-South cooperation, halfway between bilateral assistance and multilateral assistance

— Global solidarity mechanisms, based on utilizing the dividends of globalization (using the contributions from economic sectors that benefit from globalization.)

C. Mechanisms and sources

i. Innovative financing is based on 6 types of mechanisms:

— Levies on globalized activities
— Voluntary or “citizen” contributions (by individuals or businesses)
— Guarantee mechanisms
— Debt management mechanisms
— Market-based mechanisms
— Lotteries

ii. Main sources of financing:

Levies on international activities

— Tax on airline tickets

Implemented following the Landau report (2004) and a Franco-German initiative, the tax on airline tickets now ensures better access to healthcare in developing countries through UNITAID.

UNITAID is an international drug purchasing facility, responsible for centralizing the purchase of medications in order to achieve the best possible prices, in particular for developing countries. 11 countries have already adopted such a tax.

— Global tax on foreign currency exchanges

Recommended in the Landau report in 2004, the Stamp out Poverty report commissioned under Norwegian presidency of the Leading Group in 2007 and the Leading Group’s Globalizing Solidarity report (2009), the idea of an international tax on foreign currency exchanges is still at the project stage. Although certain member countries of the Group, such as France (following the vote on the finance bill in 2002) have already adjusted their legislative systems in order to introduce a tax on transactions on the currency market, its entry into force is for now contingent on its implementation at the EU level. Other countries still regularly discuss this idea; it was discussed again during the Doha debates in 2008.

— Tax on financial transactions

In his statement to the General Assembly on 20 September 2010, President Sarkozy called for the creation of such a tax in order to take action “to combat poverty, promote education and resolve the major health issues affecting Africa.” As of now, around 20 countries, including Germany, appear to support this initiative. Certain member countries of the Leading Group supported a declaration in support of such a mechanism to promote development.

The creation of such a tax (foreign currency, bonds, stocks, derivatives, etc.) is less concerned with combating speculation than generating substantial revenue for development. It would also be imposed at a very low rate on certain products or operations seen as promoting speculation: Credit Default Swaps (CDS), referred to as “naked CDS,” which are supposed to protect investors against the risk of a government bankruptcy, or “high frequency trading” based on computer-driven exchanges executed in nanoseconds. This has already been partially implemented in one form or another in most of the world’s financial markets with the exception of certain off-exchange transactions. If it is implemented on a global scale, it could potentially generate $900 billion per year based on a rate of 0.1%. This instrument would therefore make it possible to raise significant revenue for development, while spreading the cost of the contribution throughout the global economic and financial system.

On 28 September 2011, the Commission proposed, at the European level, a tax on financial transactions, recommending the establishment of a ceiling of 0.1% for securities transactions and 0.01% for product transactions by 2014.

In their final declaration in Cannes in November 2011, the G20 members reaffirmed the need to continue discussions on the creation of “a tax on financial transactions to support development.” (Para. 82)

France supports the idea of introducing a tax on international financial transactions; on 29 January 2012, President Sarkozy announced that he wanted to introduce a tax of 0.1% on financial transactions from August 2012.

In its report submitted to the Secretary-General on 7 February 2012, in preparation for the 13th interministerial summit from April 21 to 26 in Doha, the UN Conference on Trade and Development recommends creating such a tax in order to contribute to financing public goods for development.” (p.52)

On the occasion of the 10th plenary session of the Leading Group in Madrid on 27 February 2012, the “Working Group on International Financial Transactions” reaffirmed the feasibility of such a tax based on the conclusions of the most recent expert report “How can we implement today a Multilateral and Multi-jurisdictional Tax on Financial Transactions?”

— Solidarity contribution on tobacco

The idea of a solidarity contribution on tobacco (SCT) stems from a World Health Organization (WHO) initiative aimed at “extending the compulsory solidarity contribution on airline tickets and exploring the feasibility of solidarity levies on tobacco and monetary transactions,” as indicated in its report.

Guarantee and pre-financing mechanisms based on financial markets with public guarantees

— Advanced Market Commitments AMCs

Advanced Market Commitments - an innovative solution aimed at addressing failures of the drug market in the world’s poorest countries. Due to a lack of solvent and secure demand, the pharmaceutical companies have, until now, focused their efforts on researching diseases that affect the richest countries. The Advanced Market Commitment pilot project was introduced for the pneumococcal vaccine in order to correct failures in the drug market. This mechanism involves establishing a partnership with the pharmaceutical companies in order to ensure that research is being carried out on diseases affecting the most underprivileged groups. Unlike mechanisms such as the IFFIm and the UNITAID central purchasing facility which use their funds to purchase existing drugs, Advanced Market Commitments finance research for drugs under development.

— The International Finance Facility for Immunization

The International Finance Facility for Immunization (IFFIm) is a massive pre-financing mechanism based on loan guarantees, introduced in 2006 on the initiative of France and the United Kingdom. Funds are raised by issuing bonds on the basis of donor pledges (countries or private foundations). These are purchased on the financial markets and are issued regularly on the basis of the scheme drawn up when the pledges are signed. Funds are therefore perfectly predictable and stable and can be used directly for projects in the health sector. Donors involved in this initiative have pledged close to €4 billion over 20 years to fund wide-ranging immunization programs. The funds are managed by GAVI (Global Alliance for Vaccines and Immunization) which allocates them to immunization projects; GAVI verifies the reliability of these programs.

Market-based mechanisms

— Carbon auction mechanisms

Germany was the first country to introduce a system to reallocate part of the revenue from the European carbon emissions quota auctioning system to climate change adaptation projects. France has pledged to do the same after 2012 in order to finance climate actions in the poorest countries (conclusions of the Interministerial Committee on International Cooperation and Development – June 2009).

Debt2Health partnership

The “Debt2Health” mechanism offers a partnership whereby the creditor country foregoes repayment of a portion of its claims in exchange for a counterpart payment by the beneficiary country to the Global Fund to Fight AIDS, Tuberculosis and Malaria, for efforts in that country. During its pilot phase (2007-2009), €81.8 million in additional funding was made available through this mechanism, involving Germany and Australia as creditor countries with Indonesia, Pakistan and Côte d’Ivoire on the beneficiary side.

Voluntary private sector contributions channeled through public authorities

— The GAVI Matching Fund

Mechanism based on a public/ private partnership. Donor countries match the contributions pledged by foundations, corporations and other organizations. These funds are paid to GAVI allowing it to finance vaccination projects in the poorest countries.

3. France’s commitment to innovative financing

A. France spearheads the discussions on innovative financing

France has been involved in the debate on innovative financing from the outset through the Quadripartite Group, notably under the auspices of the UNSG. The Landau report commissioned by President Chirac and published in 2004 is one of the first expert reports on this topic.

In 2005, France introduced the tax on airline tickets (almost $1 billion has been paid to UNITAID since then) and participated in the creation of the International Finance Facility for Immunization (IFFIm) to which it contributed $1.7 billion.

France assumes the role of Permanent Secretariat of the Leading Group on Innovative Financing for Development, the main forum for discussing and exchanging information on innovative financing. Established in 2006 following a ministerial conference in Paris on innovative mechanisms of financing, it now comprises 63 countries, with differing levels of development, and the main international organizations (notably the World Bank, the UNDP, UNICEF, the World Health Organization, UNESCO, and the FAO), as well as NGOs and foundations.

Identifying new financing methods and assessing their feasibility

The main task of the Leading Group is to contribute to the emergence and spread of initiatives in the field of innovative financing for development, to promote the principle of solidarity contributions and to explore ways to use the revenue generated to support coordinated and sustained action in various areas of development.

The Leading Group established 5 Task Forces made up of experts responsible for examining the options for formulating proposals for mechanisms to increase financing for development in the main areas identified: Food security (2011), combating illicit capital flows and tax evasion (2009), health (2010), education (2011) and financial transactions (2009). One of the main responsibilities of the Task Forces is to develop expertise on these issues through reports that assess the feasibility of existing mechanisms and which propose new initiatives. At the most recent plenary session of the Leading Group in Madrid on 27 February 2012, 3 new reports on health, education and private philanthropy were presented.

The Leading Group is also continuing to implement the proposals made by the G20 Development Working Group in 2011 aimed at reducing the cost of transferring migrant remittances by 5% by 2014 (Paragraphs 57 & 58).

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B. Progress achieved under French presidency of the G20

Defined as a priority of the French presidency of the G20, financing for development was at the heart of the discussions of the G20, which, for the first time, took official action to implement innovative financing mechanisms. At the Cannes summit, numerous studies were presented, such as the Bill Gates report on financing for development, commissioned by the French presidency, notably outlining the various innovative options envisaged (contributions on globalized activities such as financial transactions, Advance Market Commitments, various market-based mechanisms, etc.) as well as their feasibility.

In the Cannes Summit Final Declaration (para. 82), the G20 members pledged to continue the efforts undertaken, to examine and promote the new mechanisms included in the set of options aimed at complementing traditional Official Development Assistance.

At the press conference at the closing session of the G20 Summit in Cannes on 4 November 2011, France, through President Sarkozy, confirmed its determination to introduce, together with other countries, a tax on financial transactions:

“The G20 acknowledges the initiatives in certain member countries to tax the financial sector for various purposes, including a financial transaction tax to support development. […] From a moral point of view we believe it’s absolutely essential for people throughout the world to know that the financial players who led the world into the mistakes we’re aware of will be made to contribute financially to repairing the damage. […] France believes a large share, yet to be defined – a majority of the total – should go to development.” (Paragraphs 14-16)

(June 2012 )