The finance tools examined in the report have been used effectively in other sectors -- for example, to provide vaccines to developing countries -- but they have not been used in food assistance delivery. The report recommends using such instruments as call options, guaranteed bonds and tax credits to help improve assistance groups' ability to deliver desperately needed food on time and at lower cost.
The report is the result of a Financial Innovations Lab, hosted by the Milken Institute with support from the Bill & Melinda Gates Foundation, which took place in Washington, D.C., in July 2009. The participants included humanitarian and government agencies and experts from international development finance institutions, commodity exchanges, banks, foundations and research organizations.
At the Lab, participants noted that the main challenges facing global food assistance organizations fall into three categories: funding, price and supply.
Funding, which primarily comes from donations, is unpredictable. This unpredictability, combined with some donors' restrictions on the type of aid they can provide (i.e., in-kind or cash) and where their donations may be used, severely constrains organizations' planning and budgeting. The uncertainty also prevents them from taking advantage of economies of scale or stocking up on supplies when prices are low.
Volatile prices and long and difficult transportation routes, trade barriers and security concerns also make it difficult for food assistance to reach those in need.
To help break through these barriers, the report recommends a number of finance tools, including:
Issue food assistance bonds backed by donor commitments. These are legally binding donor pledges that could be securitized in capital markets, allowing organizations to access the funding when needed instead of waiting for the next donation to arrive.
- Make purchases in advance. Unpredictable funding, among other factors, often forces groups to make spot purchases of supplies. But forward purchases, completed before the supplies are needed, allow organizations to lock in lower prices and offer them more flexibility on volume and delivery locations.
- Use call option contracts. These would give assistance groups the right, but not the obligation, to buy supplies at a certain price for a certain period of time, allowing the organizations to optimize their donor dollars.
- Explore the increased use of public-sector grain reserves. Greater use of locally held grain reserves would dramatically improve response times but must be planned and coordinated carefully to avoid disrupting local markets or discouraging private-sector reserves.
- Arrange tax credits for private-sector companies so that humanitarian organizations can tap their food stocks at the tax-free price. Private-sector tax credits could increase available food supplies and enhance flexibility in sourcing and distribution.