UNDP Alternative Financing Lab - the next big thing is a lot of small (and smart things)!

September 20, 2016
‍(Image via Kaplan collection agency)

Authors: Marina Petrović / Robert Pašičko / Milica Begović

Ten months ago we had an eclectic group of people introduce a slew of new financial mechanisms- blockchain based cash transfers and impact bonds for reducing recidivism to forecast based finance for disasters and peer to peer lending for SMEs- emerging into what the ODI calls a new ‘age of choice’ for the development finance.   

We tackle this topic not just because there is a $2.5 billion gap in funding the current SDG agenda (even though ODA flows to developing countries continue to increase year on year).  We are more tickled by the sheer explosion of money coming from other sources of funding that aren’t high on the priority list of either development organizations or governments (admittedly this is fast changing)-  the European alternative finance market grew by 144% in 2015, the  global impact investment market is projected to grow over $3 trillion in the coming years, and crowdfunding investments reached $37 billion in 2015 (by way of comparison, this is about ⅓ of total ODA totaling $131 billion in 2015).  

This tickle gave birth to a sort of an Alternative Finance Lab we’ve (unintentionally) began running out of Istanbul.  What skills do our clients need to tap into some of these new sources of funding?  Is the effort worth it given the experimental nature of some instruments and the fact that they are way ahead of existing legislation in most countries we work in (think blockchain based remittance transfer)?  Many of the mechanisms are preventative in nature and require a shift to costing future liabilities (think of a financial value on the cost society bears from youth unemployment- what does a ‘log frame’ for that type of a project look like?  

In tackling some of these questions since the beginning of the year, we mobilized over EUR 3 million across a series of experiments with these new financial mechanisms:  

Blockchain and development

In Serbia, we’re working with superstars from AidTech (check out their prize winning prototype on reducing fraud in cash transfers for refugees in Lebanon) to design a proof of concept for remittance transfers over blockchain that would be cheaper (in looking to cut out an intermediary a la Western Union) and targeted toward specific needs (think using remittances to pay energy or phone bills and purchase food).  There are several similar initiatives ongoing (check out these Tunisian start-ups redefining remittances transfers with blockchain) but for us this is a first.  In Moldova, we’re testing whether blockchain can provide a more effective way of managing the UN car fleet together with EmerCoin and DeePlace.  We’ve been inspired by a decentralized ride-sharing outfit in Israel, Lazooz and driver-owned car sharing start up Arcade City.  When it comes to UNDP’s emergency response in employment, we have a hunch that blockchain could provide a more effective way of transferring and tracking funds, and shifting our strategy in line with what is happening in the field- this is a work in progress though but one we’re excited about.  

We’re cooperating with the Joint Research Center of the European Commission (check out an impressive line up of people they’ve had for a discussion on distributed ledger technologies a few months back) on design of a challenge prize for social applications of blockchain that would (hopefully) incentivize use cases that go beyond financial sector.  The speed of progress in this field has been staggering with new use cases popping up across just about all priority sectors for our client governments- for example, the UK government just published research showing how digital currency based on the distributed ledger could up the GDP by as much as 3%.  Others include blockchain based micro energy grids, land registries (Georgia) and election platforms (Ukraine’s Parliament), defrauding distribution of natural disaster relief funds (Italy) and philanthropic donations, managing and tracking the cross border SME trade, boosting girls education and storage of cultural heritage in political conflicts to name a few.  

Preventative finance: social impact bonds and forecast based finance

In Serbia, we’re working with the Finnish Innovation Fund Sitra on designing a social impact bond on youth unemployment. We were inspired by their work on using this financial mechanism for public sector absenteeism and migrants and employment both of which have flipped the concept of welfare from being considered a cost to being the government’s investment in social outcomes.  We will have some fresh data on this in the coming weeks, but accounting only for wages and taxes foregone and cost of social transfers avoided the cost exceeds EUR 1.5 billion a year (and this does not include other costs such as likelihood that unemployed youth may be more likely to suffer from depression and alcoholism, engage in violence). In Belarus, the European Commission has invested in our team to design an Outcome Buying facility (where impact bonds will be one of many instruments to include a mix of grants, impact investment, and others).  The results of SIBs globally have been mixed at best, but we believe there is a lot to be gained from calculating future liabilities, attracting new sources of funding and holding pay-outs contingent on achieving the results (as opposed to fulfilling activities).  Apparently so do others with the government of Netherlands issuing its fifth SIB on employment, transitioning of youth from Out of Home facilities (drug and alcohol abuse) in Australia, and a massive $30 million first humanitarian impact bond launched by the International Red Cross and the Belgian government.

When it comes to the forecast-based finance, we’re learning from the best! Together with the Red Cross/Crescent Climate Center, our team in Bosnia and Hercegovina is designing the FbF mechanisms for the Vrbas basin.  Ultimately our intention is not only to minimize the risk and secure funds before a disaster has received sufficient media support but also to test the feasibility of attracting new sources of funding (think insurance companies) for community resilience.   

Crowdfunding in development

Since we launched UNDP’s 1st Global Crowdfunding Academy in December (followed by a succesfull Crowdfunding Academy in Croatia), we’ve worked on 13 crowdfunding campaigns that mobilized over $200,000 across a range of sectors including health, inclusion, energy and entrepreneurship- Kyrgyzstan raised funds for a more inclusive and energy efficient retirement home in a rural area, Indonesia got resources forrenewable energy in rural areas, Moldova mobilized funds for healthy food in public schools, and Yemen for a range of community projects unique to the conflict contextof the country.  Currently, we’re preparing the launch of a campaign in Bangladesh on youth employment and Lebanon who already raised $116,000 for traffic management and control around public schools.  

All of these were donation based campaigns where one of our main take aways has been their ability to link us up to interesting new partners and help us with advocacy.  For example, our Tajik campaign attracted the country’s diaspora in Australia not only to donate funds but also explore investment in a similar new project in the eastern region. Famous chef, Jamie Oliver, supported our fresh fruit campaign for public schools in Moldova and Bangladesh cricket national team captain Mashrafe endorsed the campaign for building employment skills for the youth. The Balkan rock star Rambo Amadeus got behind a campaign to build solar power sail boats on the Adriatic, and Yahoo picked up on our efforts to invest in refugee-driven pop up restaurants.  The Croatian Ministry of Construction prepared a pilot project for refurbishment of 30+ schools (and an energy agency designed a dedicated platform) to replicate our success with building the first Energy Independent school in the country.  

Moving forward with this line of work, we’d like to put more emphasis on equity crowdfunding (example on investment in renewable energy community project) and peer to peer lending (check out this investment for SME on furniture design in Tajikistan) as our hunch is that these mechanisms can help us redirect vast diaspora funds more closely to bottom up, entrepreneurial projects in communities across the development work. We will have a chance to experiment with this approach together with the UNFCC with who we are currently designing a system by which crowdfunding can be utilised for renewable energy programs alone. 

What’s next?

We’d love to see Open Bank initiative functioning in one of our projects (think a crowdfunding campaign where  a single donor can track her investment through the point of a purchase) and we’d love to tinker with the GrowFund and Fund Club-like idea where we’d combine crowdfunding with corporate investment and peer to peer donations.  Mobile money hasn’t taken off in Europe and CIS (which is where most of our time is invested at the moment), so we’d like to explore why and how to change that.  We also haven’t yet but would like to troublemake with Disberse team who seem to have put together a number of puzzles that for us are still up in the air- social cash transfers, impact bonds and payment for results, blockchain and transparency- all under the chapeau of future of development finance.  We’ve also got a few things cooking with AlliedCrowds and Cambridge Alternative Finance Lab but more on that soon.  

Ps. We would like to acknowledge the very first investor in our Alternative Finance Lab- the Ministry of Finance of Slovakia.