Guest Blog: Innovative Financing in Small Island States

Liz Thompson is a sustainability consultant. She has served as Assistant Secretary-General of the UN for the Rio+20 Conference on Sustainable Development, as an elected Member of Parliament, Senator and Minister of Energy and Environment of Barbados and most recently as Interim Executive Director of the SUNY-UWI Center for Leadership and Sustainable Development.

I keep reflecting on the approach of innovative financing which is now very much a part of the multilateral agenda. The more I reflect, the more troubled I become. innovative financing generally includes maximizing national revenue streams by effective #taxation and efficient tax collection and stamping out corruption. This is combined with using private sector capital to finance development infrastructure and activities. The private sector is expected to finance infrastructure in 3 ways - through direct loan financing to government, through BOOT and BOLT financing mechanisms/tools, through direct involvement in development activities for which user fees are paid, or advancing monies or joint partnerships on development projects and programmes with government.

This sounds great. In some countries in works very well. As a Caribbean national, I have very serious doubts about the extent to which this is really practical in small island developing states (#SIDS).

My reasons are these. In the Caribbean and other SIDS, the private sector is small so the tax take is small and cannot truly finance development activities. In addition, the local and indigenous private sector in SIDS is comprised, not of MNCs but predominantly of SMEs. They do not generate the kind of capital that is required to build out infrastructure, execute projects or programmes and they are not a good source of taxes or capital. They would therefore not be a good source of development or loan financing.

In Caribbean SIDS, foreign direct investment (FDI) is shrinking. And in the case of the Caribbean islands which have been hard hit by the global financial crisis, debt to GDP ratio in many countries exceeds 100%.

Placed in this context you can see why it is necessary to have a new dialogue on sustainable development and development financing in small island developing states. New and innovative financing mechanisms would have to be nuanced, relevant to the size, capacity, socioeconomic and “peculiar vulnerabilities” of SIDS. These factors have made SIDS slow or unable to access financing mechanisms now in existence. Moreover, the issue of what innovative financing means in the context of SIDS has not been truly explored.

Crafting innovative financing mechanisms cannot be a one-size-fits-all formula. Making such mechanisms relevant and effective for SIDS is particularly challenging having regard to the underestimation of the large and urgent development needs of small developing states, coupled with the perception that SIDS are doing well. This is the result of many of them being classified as middle-income countries and their graduation from the concessionary financing provided by international financial institutions. When one drills down deeper and reviews how SIDS have performed on the human development index and in terms of real GDP growth in the wake of the global financial crisis, a more sobering picture emerges.

Financing approaches can also be developed to address specific areas of development policy and programming. An area in which the need in SIDS is great and immediate is in financing climate change mitigation and adaptation. One mechanism to which I am attracted and about which I have written in the past, is the development of a maritime model analogous to REDD+. Given the multilateral conversations, agreements and approaches on SIDS following Somoa, on FfD following Addis Ababa and on climate change, following Paris, there is now scope to think and act differently. The opportunity exists to craft real deliverables in SIDS at the national levels as well as under partnerships and platforms for North-South and South-South cooperation.

Natural capital assessments and funding mechanisms to protect SIDS societies and economies against climate change in SIDS must take into account their maritime resources, which greatly surpass their terrestrial resources. A few examples will suffice – Tuvalu has a land space as 10.04 square miles or 26 square kilometres but an exclusive economic zone (EEZ) of 751,797 square kilometres/467,144 square miles. Samoa’s land space measures 1137 square miles or 2944 square km but it’s EEZ, 131,812 square km/ 81,904 square miles. In the Caribbean, the Bahamas which has a coastline of 11,238 km/6,385 miles, identifies an EEZ of 369,149 square km. Barbados, with a coastline of some 97 km or 66 miles and a total land mass of 432 square km (166 square miles) records an EEZ of 183,436 square km/113,981 square miles.

By way of analogy and comparative analysis, the REDD+ initiative was developed to provide financing and support for activities which reduce carbon emissions and militate against deforestation and degradation in countries with substantial forest cover. Seas like forests, are effective carbon sinks. This begs the question – “Should we not now be considering some corollary marine mechanism for SIDS, particularly having regard to their large maritime territory?”

Such a mechanism would benefit SIDS within new frameworks of natural resource accounting, in evolving environmental and development metrics, in the mobilisation of finance for research and activities related to climate change adaptation and mitigation, poverty eradication, sustainable human development and in effecting transition to sustainable energy and a green economy. It would also be compatible with post-Paris thinking and approaches.

The structure of such a mechanism could include:

• A Board with representation from SIDS regions, organisations, development partners, relevant UN, international and technical agencies.
• A Secretariat staffed by multidisciplinary experts.
• A Blue Investment Fund or finance instrument to provide SIDS with the financial resources to manage and protect marine resources, ecosystems and coastlines.

The mechanism would have:

• Capacity for implementation, monitoring, measurement, reporting and verification.
• Provisions to protect the value of oceans and seas as the environmental lifeblood of SIDS and the planet. 
• Capacity to track and monitor the health of seas and oceans and their effectiveness as sinks.
• Capacity to inventory and evaluate marine flora and fauna, including but not limited to coral reefs, kelp, seagrass beds and minerals.  
• Knowledge platforms for sharing technology, research, best practices, data and information for decision making.
• Compatability with UNFCCC and its instruments including the Kyoto Protocol.  

The mechanism would enhance SIDS:

• Capacity for partnership and collaboration with international development and financial institutions.
• Potential for complementary funding under the UNFCCC including the CDM, GCF, GEF and existing and new financing mechanisms
• Opportunities for emissions trading schemes and funding with Annex I and II Parties.
• Potential to maximise evolving green and non-GDP measurements such as TEEB, SEEA and WAVES.
• Delimitation of maritime boundaries with corollary assessments of the contribution of EEZs to national patrimony and wealth. 
• Capacity and resilience building.

Ideally, a Seas and Oceans Climate Development and Investment Mechanism would address social, economic, environmental and climate change impacts and contribute to the transition to more green accounting systems, economies and societies. This instrument would also significantly boost the natural capital accounts and assets of SIDS while augmenting their ability to mobilise new and sustainable financial resources for human development. It would give genuine meaning to the language in the SOMOA Pathway which urges SIDS to, “engage in national and regional efforts to sustainably develop their ocean resources and generate increasing returns for their people.”