fund-raising mechanisms should be evaluated in terms of their ability to mobilize _adequate and predictable resources_ from a given source _at the minimum cost and risk_ . In particular, global solidarity levies and taxes should be evaluated in terms of the incentives they provide to achieve policy goals, their revenue potential, and their distributive impact. Financial solutions on the ground should be reviewed in terms of their ability to efficiently and effectively _deliver_ development results or maximize net development benefits. It is important to note that, unlike fund-raising efforts, solutions on the ground often take time to materialize.

# **<u>Box 1.1: The Role of Financial Engineering in Enhancing Value Added</u>**

Innovative finance can enhance the value added of development finance at various points, from the initial mobilization of concessional funds to their deployment. Typically, this involves new approaches that perform financial transformation of development flows—through “financial engineering”—and then disburse to implementing entities, such as development institutions, governments, civil society organizations (CSOs), or private sector actors. Financial engineering approaches can be used to:

- Transform the flow of ODA or investor funds to better correspond to the _timing_ of actual development needs (e.g., through frontloading long-term ODA grants for immediate use (IFFIm)) and to help countries address various types of _risks_ (e.g., through gross domestic product (GDP), commodity price or inflation-indexed bonds; MDG contracts providing countercyclical loan flows; indexed/parametric or catastrophic risk insurance; local currency bonds and currency swaps).

- Increase the concessionality of flows through approaches that facilitate funding—whether from private investors (e.g., impact investments), governments or foundations (e.g., blending arrangements transforming loans to grants)—at costs lower than market rates.

Recently approved by the World Bank’s Board, the pilot Advance Market Commitment (AMC) is an example of how financial engineering can help to transform development finance flows to meet country needs and strengthen results. The sources of funds for the AMC subsidy are ODA and foundation grants (totaling US$1.5 billion), provided under unusually long-term payment agreements. The pledge flows are enhanced by an IBRD “guarantee.” The AMC targets private sector engagement via a unilateral offer to industry designed to spur development of manufacturing capacity to make needed vaccines. The funds flow to The Global Alliance for Vaccines and Immunization (GAVI) (which is itself portrayed as an innovative public-private partnership) and, with GAVI copayments, are used by the United Nations Children’s Fund (UNICEF) to procure vaccines. The AMC thus comprises financial transformation (long-term contributions, the World Bank’s backing), is “results-based” since it is used only for vaccines that meet the needs of developing countries, and is “country-owned” since funds are only used for vaccines demanded by developing countries. Financial engineering approaches can help make better use of ODA, while involving the private sector in supporting development. As such, they are likely to assume greater significance.

_Source:_ Multilateral Trusteeship and Innovative Financing Department, World Bank.

1.15 **In addition to the costs of financial engineering, the risk profile of fund-raising schemes and financial solutions should be considered.** Financial risks affecting _funding sources_ include currency, market, donor nonpayment, and commercial credit risks, and those affecting _uses_ can include currency, liquidity, and over-commitment risks, as well as sovereign and portfolio or project risks.<sup>5</sup> Managing these risks involves financial and administrative costs; they can also affect the likely impact of both fund-raising schemes and financial solutions on the ground. While this stocktaking does not cover the impact of innovations on development outcomes, these evaluative criteria should be considered going forward.

> 5 World Bank. _Trust Fund Financial Compendium,_ 2008.

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