On February 8, I attended an event in New York hosted by the UBS Optimus Foundation and the U.S. Agency for International Development’s (USAID’s) Center for Accelerating Innovation and Impact. The event demonstrated that the global development community has concluded that the private sector is indeed a key partner to the achievement of the Sustainable Development Goals (SDGs). The event highlighted the recently launched Utkrisht Impact Bond, a development impact bond aiming to reduce maternal and newborn deaths in India, which is led by a public-private partnership including UBS, USAID, Merck for Mothers, PSI, Palladium, HLFPPT, and the government of Rajasthan, India.
Achieving impact in a changing financial landscape
The last two decades have been coined the “golden age” of global health financing. However, at $37.6 billion, 2016 marked the third year of relatively little growth in development assistance for health, supporting predictions that external funding is unlikely to continue to grow at the rate seen in the early 2000s (Fig 1). Such investments from national treasuries (primarily the USA and UK), philanthropies, and development agencies have led to a 40% reduction in under-five child mortality, 35% reduction in the incidence of HIV, and almost halved mortality from malaria.
Figure 1. Trends in development assistance for health, 1990-2016 (IHME)
A changing landscape of global health finance, compounded by the systemic challenges and market failures that increase financial risks and costs, demands new financial solutions. The visual below shows that external financing needed to support health SDGs currently exceeds existing resources (Fig 2).
Figure 2. Estimated annual needs in external financing in 2015-2030
Innovative finance is now recognized as a central solution to filling the funding shortfall and accelerating the deployment of business solutions to development challenges. Innovative finance for development is defined as a complementary source of capital to traditional development finance and a way to make development projects more effective and efficient by redistributing risk and improving the availability of working capital.
USAID’s recent report “Closing the $2 Billion Gap” makes the investment case for community health financing. The World Bank’s Global Financing Facility pursues efforts to apply smart, sustainable, and scaled financing models and leverage the private sector to bridge funding gaps in maternal and child health. The financing mechanisms such as Gavi, the Global Fund for AIDS, TB, and Malaria, and the Affordable Medicines Fund for Malaria helped shape the current financial landscape and became an important channel for development aid for health.
Still, this funding isn’t enough and private sector involvement in global health financing remains very selective. The main reasons are costs, risks, and uncertain financial returns of overcoming the systemic bottlenecks. The playing field for the private sector has not been predictable and easily accessible until now. The trends in global health financing demonstrate the declining relevance of traditional aid and urgent need for sustainable and impactful solutions. Donors that change their strategy to engage different sources of capital will be well positioned in the coming decade to leverage their impact. The days of referring to public and private money as good and bad money have gone. A divisive paradigm of public vs. private or social impact vs. financial return is now obsolete and pending revision.
Traditional aid is adapting to a new reality
Historically, development finance came in the form of grants, often supplementing or replacing domestic resources for health programs. Beginning in 2000, traditional aid for health started to plateau, and development partners had to look for better and more sustainable solutions, including from the private sector. Thus, conditional and catalytic financing instruments were designed. They shifted the paradigm from paying for inputs to paying for results, facilitating pool investments, match funding arrangements and the provision of credit guarantees.
Private capital generates social impact
Increasingly, the private sector wealth is used to mobilize finance for public good. Private sector players launched Align17, a digital platform that would allow easier, more efficient sharing of sponsored SDG-related co-investment opportunities to attract funding. Deals would be structured to be attractive to private wealth investors, but conditional on full funding being raised in a way that benefits not-for-profit stakeholders too. Optimization of guaranteed returns and risks would significantly leverage existing funds to have even greater positive impact. Align17 is named after the 17th SDG of “partnerships for the goals”.
Both socially responsible and impact investing helps bring different perspectives and complementary skill sets to address global health challenges and improve the effectiveness of existing resources.
One cannot stop the march of progress
This event stirred a timely conversation between investment bankers, development partners, grassroots organization, and implementing organizations about a new role of the private capital. Innovative financing is the manifestation of two important trends in international development: an increased focus on programs that deliver results and a desire to support collaboration between the public and private sector. While we adjust to a new reality, it is helpful to remember that innovative finance is not financial innovation; it is an extension of existing tools and products to new markets in a collaborative manner, in which public and private capital work together.
Oleg Kucheryavenko, MD MPH (@drolegk) is a Senior Consultant at the World Bank. He is a public health professional with 10 years of experience in global health working in the areas of maternal and child health, domestic resource mobilization, financial protection, and financial instruments, including results-based financing and buy-downs. Prior to the World Bank, he coordinated health policy and advocacy efforts in the Oxfam’s program on Empowering Civil Society in an Unequal Multipolar World. He is a recipient of the World Bank President’s Award for Excellence (2017).
This blog represents the author’s personal views and not those of the World Bank Group.