Post 2015: Global Action for an Inclusive and Sustainable Future

While the mobilisation of funds from capital
markets has long been advocated as an option for
meeting investment financing gaps in developing
countries, it has been difficult to tap into international
capital markets. commercial investors have been
reluctant to invest in many of the most important
areas relevant to development in poor countries,
because these are relatively risky and unprofitable.
although the social and economic benefits may be
high, the financial viability and returns on such
investments remain low (Spratt and collins, 2012).
In response, donors have increasingly used
their oDa commitments as a means to reduce
investment uncertainty, explicitly or implicitly
guaranteeing future returns. reducing risk
allows donors to make investment projects more
financially viable and mobilise funding from
capital markets, thereby increasing the volume of
development finance. Special purpose bonds and
blended finance mechanisms are two mechanisms
used to tap capital markets based on the strategic
use of donors’ financial commitments. their use
has increased in recent years and are expected to
provide a significant level of development finance
beyond 2015 (Wälde, 2012; Girishankar, 2009). both
mechanisms have also been promoted as a means to
finance renewable energy in developing countries,
which may contribute to sustainable development
(Griffith-Jones et al., 2012; WbGu, 2012).
Special purpose bonds
Donors use special purpose bonds to raise funds
from capital markets in order to meet particular
needs. one example is the International Finance
Facility for Immunisation (IFFIm), which was
launched in 2006 and is managed by the World
bank. the IFFIm issues bonds in capital markets
to raise finance for programmes managed through
the Global alliance for vaccines and Immunisation
(GavI). these bonds are backed by donor
commitments to service and repay debt from oDa
allocations earmarked for this purpose. by 2012,
the IFFIm had raised $3.6 billion – more than six
times the amount received from donors since 2006
(IFFIm, 2012). Green bonds are used to raise funds
for climate-change adaptation or mitigation in
developing countries and have appealed to those
Socially responsible Investors who prioritise these
issues. the World bank has issued over $3 billion
in Green bonds since 2008, selling triple a-rated
bonds to investors (World bank, 2012b).
Special purpose bonds offer considerable
opportunities to increase the contribution oDa
makes to development by increasing its volume at
critical moments. more generally, their backing
by sovereign states makes such bonds attractive
to institutional investors that can provide some of
the large-scale, ‘patient’ capital needed to finance
infrastructure projects (Spratt and collins, 2012). 79
Such bonds make it possible to raise development
finance for immediate use. this makes them
particularly suited to projects in which most funds
are required at the start (so-called ‘frontloading’)
rather than at later stages. this tends to be the case
in projects aimed at prevention, for instance of the
adverse effects of climate change or the spread of
communicable diseases, which usually require large
initial investments to achieve returns over the long
term, although the financing needs subsequently
decline.
of course, there are challenges to increasing
the oDa contribution through such bonds. In
particular, frontloading mechanisms do not raise
additional development finance because the net
increase in oDa in the medium term is offset
by the forward commitment of oDa budgets for
debt repayment rather than being available for
new development needs. In addition, funds raised
through special purpose bonds are vulnerable to
79 Given the scale of assets under their management and their long-term liabilities institutional investors could be significant sources of development
finance. For instance, European institutional investors such as pension funds are estimated to hold assets worth up to $12 trillion
(Griffith-Jones et al., 2012).
poSt-2015: Global actIon For an IncluSIvE anD SuStaInablE FuturE
Special purpose
bonds and
blended finance
mechanisms are
two mechanisms
used to tap
capital markets
based on the
strategic use of
donors’ financial
commitments.
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