Financing development in Pacific SIDS due for a drastic re-think

Authors:
Matthew Johnson-Idan, Development Economist, UNDP Pacific Office in Fiji
Bram Peters, Programme Manager – Pacific Financial Inclusion Programme, UNCDF
Sanjesh Naidu, Economic Adviser, UNESCAP Pacific Office

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of UNDP, UNCDF or UNESCAP. 

Climate change has created unprecedented development challenges for Pacific SIDS. Thinking about the cost of increasing frequency and severity of climate-related disasters alone, damage and losses from Cyclone Pam that affected Tuvalu and Vanuatu in March 2015 have been estimated at 34 percent and 61 percent of GDP, respectively.

The overall framework of efforts to address these challenges is set out in various agreements, such as the SAMOA Pathway, the 2015 Paris Agreement and the Sustainable Development Goals. Each Pacific SIDS has put considerable effort into developing long-term strategic plans, clearly setting out development visions and key aspirations in line with this framework, consistently identifying the urgent, in some cases potentially existential, threat from climate change. And yet, across the region, delivery on these ambitions is lagging.

Not only are the development challenges and efforts required to address them unmatched in history, more and more the realization is kicking in that this needs to be matched with an equally unprecedented mobilization of financial resources. And, as if the mobilization itself is not difficult enough, this also raises sometimes uncomfortable questions around the capacity to absorb those capital injections quickly and efficiently in Pacific SIDS.

As was made abundantly clear in the various high-level meetings at the UN General Assembly last month, growing concerns about the impact of climate change have put discussions around development finance in the spotlight. Time is not on our side, and perhaps nowhere more so than in the island countries of the Pacific.

With this situation in mind, it begs the question if we shouldn’t revisit the way we approach development finance. Rather than looking for more incremental innovation, collaboration and scaling the existing approaches, shouldn’t we question even how we frame the question about financing development? Is there a need for a drastic re-think?

An unexpected parallel

Sometimes, inspiration can come from unlikely places, and the challenges that might seem overwhelming are the ones that lead us to new and better ways of doing things.

Look at history. Warfare is an extremely expensive business, and yet, for whatever reasons, countries have found themselves in conflicts with first and foremost incalculable human losses, but also crippling financial costs.  

In these times of crisis, faced with imperatives that cannot be ignored, and needs that could not be met with the resources that seemed to be available, governments have shown great creativity. And this creativity has in fact laid the foundations of many of the earliest forms of public finance. This ranges from the practice of taxing the population, to borrowing by monarchs, the creation of government bonds, and more recently the Marshall Plan to rebuild Europe after WWII. We may perceive these as normal practices nowadays, but all were extraordinary at the time of introduction and came about only when the situation looked at its bleakest.

The challenges facing Pacific SIDS call for that same creativity and determination.

Money on the table

Finding ways to get needed resources invested more effectively into nationally owned priorities matters. This goes as much for investments in social sectors such as health and education that are crucial for delivering on human development ambitions, development of economic infrastructure to boost competitiveness, as for financing vital climate change adaptation in small, vulnerable islands.

Partly this is about ensuring that Pacific countries are able to get adequate access to international public sector and concessional financing, including development partners living up to the commitments made to support SIDS, especially when it comes to climate finance.

It is also about the ability of governments to raise resources domestically. The reality across most Pacific SIDS is one of small private sectors already struggling with small markets and high operational costs, and often large informal sectors. However, more domestic resource mobilisation can both make financing more predictable and give Pacific leaders greater autonomy in determining how resources are used, and in many cases, there is certainly room for improvement. The success of the Vessel Day Scheme for purse seine tuna fisheries[1] showcases how improved management of available resources can radically change the revenues that are derived from it.

Sticking to the plan

Delivering on ambitions is also about focus and efficiency. Pacific countries’ own budgets- the funding governments have the most direct control over- often deviate significantly from the priorities set out in national plans. Management of windfall revenue, and allocation of expenditure to productive investments require improved fiscal discipline, coupled with governance arrangements which prioritise national sustainable development concerns.

Often, challenges emanate from the planning side as a result of unrealistic and unclear policy and planned interests. This is exacerbated by lack of understanding of cost estimates at the planning stage, which in turn, makes allocation of budgetary resources challenging. On the budget side, similar challenges arise from fiscal constraints, political interests which often shape allocations, and major capital spending which is often dependant on foreign aid.

Private Messages

The answer cannot just be about public investments, but also what can be done to improve the alignment of private investment with national plans.

The 2015 Addis Ababa Action Agenda puts forward a set of strategic recommendations for leveraging finance from all sources to make the achievement of Sustainable Development Goals a reality. Therefore, it is well-accepted that the 2030 agenda can only be achieved with the support of the private sector. And yet, the private sector is more often than not seen as just a (limited) source of tax revenue, rather than an intrinsic stakeholder and contributor to national progress. Decisions about policy tend to be made behind closed doors, missing out on opportunities to build private sector buy-in, and crowd in vastly more investment.

In most Pacific countries, the public sector- either domestic or international- currently dominates the development financing landscape. Across the region domestic public finance accounts for more than half of total financing, and international public finance more than 20%. Private financing accounts for less than a quarter of total resources.[2] National plans often explicitly recognise the need to strengthen and engage the private sector as part of their vision, but practical steps to bring this about are generally limited. Yet the potential is significant – if Pacific countries were to unlock domestic lending and attract FDI at levels similar to those in other SIDS it could unlock over $1.2 billion in domestic investment and close to $1 billion in foreign direct investment each year.[3]

Walking the talk

It is one thing to say that there is a need for a major re-think of how we approach financing development, actually doing that is quite another.

Taking everything, we know about the situation in the Pacific, points towards the ‘governance’ aspects of raising, managing, and utilizing development finance as potentially unlocking the most progress. The UN in the Pacific has taken some tentative steps toward working with governments and the private sector in the region to develop new ways of doing things.

One important part of this is recognising the benefits that can come from stepping back and looking at the full picture, rather than being locked into discipline, sectoral, or ministerial silos. Taking a more integrated approach that looks across the full range of potential sources of financing, the mechanisms by which it is managed and targeted, and national objectives and goals, offers the best chance of spotting new systemic opportunities.

In this vein, UNDP has worked with the governments in Fiji, the Marshall Islands, Samoa, and the Solomon Islands to undertake Development Finance Assessments that map the landscape of development finance in each country and start to identify possible ways to improve on the status quo. These provide a solid basis thinking about concrete ways to improve Pacific countries’ ability to finance their development needs but are only an early step.

Building on this, the Solomon Islands has become a global leader in developing an Integrated Financing Framework. Under the leadership of the National Development Strategy Implementation Oversight Committee, this brings together policy areas from across government and identifies specific policy actions to deliver on national plans- working to break down silos in how development financing is thought about at the national level.

There are also more specific, practical things that can be done. Working with the private sector and governments, the UN’s Pacific Financial Inclusion Programme (PFIP) has successfully created innovative financial solutions for underserved populations in Fiji. One of these was the development of a bundled micro-insurance product by FijiCare, providing a combination cover for life, personal accident and fire to more than 120,000 Fijians. With this initiative alone insurance coverage in Fiji has grown from 12% in of the adult population in 2015 to more than 40% of the adult population in 2019.

The experience with the bundled microinsurance product created the levels of trust required within the insurance industry to innovate and try out new approaches. This experience has led the PFIP team to reach out to the Munich Climate Insurance Initiative, who have extensive experience in the Caribbean to develop a new programme, the Pacific Insurance and Climate Adaptation Programme in order to respond to the growing needs for finance and insurance solutions for the many natural catastrophes in the Pacific region.

Fiji broke new ground for the emerging economies with its issue of the Pacific’s first ‘green bond’ in 2017, drawing on technical support from the World Bank and Australia to raise $50m in financing climate change adaptation and mitigation.

A drastic re-think

Despite some of these promising examples, few really believe that the current efforts will be enough to overcome the challenges posed by climate change, or to achieve Pacific SIDS broader development ambitions. The progress of action remains dramatically insufficient and it becomes ever more evident that it is not enough to just intensify our efforts. Therefore, we realize that we need to ask ourselves some hard questions about whether the path we are on and more importantly the speed with which we are moving is enough if we are to rise to the challenge in front of us.

So, perhaps, what is needed is a drastic re-think about the way we approach development finance. The question worth asking then becomes; Is the threat posed by accelerated climate change enough to push governments, development partners and other, sometimes forgotten stakeholders, such as the private sector to start thinking about unprecedented development finance solutions and more importantly dare to make bold decisions? And if it is, what might they look like?

Maybe we can draw inspiration from the scale of previous crises, such as warfare and show some of the extraordinary creativity and boldness that has characterised previous leaps in how we have financed solutions for these challenges. There is international experience and expertise that we can draw on to work with local knowledge and understanding. There are new financial instruments and mechanisms available that we can take inspiration from, and global support and momentum from which we can take some hope. But, ultimately, what will matter most is the determination, creativity, and leadership of people living and working in Pacific countries to tackle the challenges head on.

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[1] The Vessel Day Scheme is a scheme where vessel owners can purchase and trade days fishing at sea in places subject to the Parties to the Nauru Agreement. The purpose of the VDS is to constrain and reduce catches of target tuna species and increase the rate of return from fishing activities through access fees. For more info: https://www.ffa.int/vds

[2] UNDP, 2016, Achieving the SDGs in the era of the Addis Ababa Action Agenda.

[3] Calculated from World Bank data based on domestic credit to the private sector and FDI data relative to GDP in Pacific countries compared to other small island developing states.