Three key ways to modernize humanitarian finance

Is the humanitarian system broke or broken? 

In 2020, the international humanitarian system is projected to need $29 billion to respond to crises around the world. This is $2 billion more than was received in 2019. Such appeals have been underfunded by a steady 40 percent in the past decade, leading many to argue that humanitarian agencies just need more money.

Yet, just four years ago, a high-level panel found that while the lack of funding is a problem, inefficiency in spending remains one too. The main humanitarian donors and operational agencies agreed to a “Grand Bargain” which has led to some improvements, but has failed to fix those inefficiencies.

So, what next? Over the past few months, researchers from the Center for Global Development (CGD) have been working with experts in humanitarian finance from both donors and aid agencies to take stock of reforms and explore possible avenues for more significant change. I outline three such avenues below.

Diagnosing the problem

Past reform efforts have only made incremental progress because the system’s power structure and business model have remained largely unchanged. It is as if the system was a building made of several different houses put together, with a few extensions added over time. While the foundations are solid, more structural work is needed to get rid of unnecessary walls and join up some of the utilities to make the whole more energy-efficient. Resources are still raised using a “begging bowl” approach that creates incentives for reactionary practices as well as competition. Governments, who donate 78 percent of global humanitarian finance, allocate funds almost entirely as discretionary grants to a relatively limited set of United Nations (UN) agencies, Red Cross agencies, and international NGOs.

Money is usually disbursed after a disaster has struck, even when that disaster was predicted, leading to unnecessary deaths and additional costs. And although 86 percent of humanitarian finance goes to crises that last between three years and several decades, each donor allocates funding in different “lumps,” with often short timeframes and little flexibility to make changes along the way. In their defence, donors would argue that they rely on planning information from agencies, which is, on the whole, short-term and projectized.

These inefficiencies are partly driven by a fragmentation in the system: each agency is driven to compete with others to raise funds. In this environment, UN agencies capture the majority of resources. Their combined roles of coordinator, assessor, implementor, and monitor within their sector gives them an unbeatable advantage. They also offer donors a way to pool transaction costs and risks. This provides incentives to maintain costly parallel systems rather than to share resources and collaborate. As a result, the sector still struggles to present a collective and objective picture of needs and relative severity, and to allocate funds strategically.

A large part of the funding UN agencies receive is passed on to NGOs, who might themselves sub-contract local actors to deliver. It is often unclear whether the value added by each intermediary justifies the overhead costs. In fact, because donor funding is so projectized, humanitarian organisations rely on those overheads to maintain their core functions, creating incentives to maintain large operations, and high rates.

Pathways to change (and some myth-busting)

Without addressing power imbalances, vested interests, and skewed incentives, radical progress on reform objectives is unlikely. Our research has identified three potential pathways to change:

1. Pre-arrange more finance

There is a growing recognition that acting ahead of disasters—using anticipation and pre-arranged finance released on the basis of objective triggers—can help save lives, reduce suffering, and significantly lower the cost of humanitarian response. Regional insurance pools have started to show their value for specific types of predictable events. The START Network and the Red Cross have created anticipation “windows” in their contingency funds and the UN’s Central Emergency Response Fund (CERF) is scoping out how to fund early action. However, these mechanisms remain too small in scale to be transformational.

Here, a few assumptions surrounding innovative finance should be debunked:

• Triggers are important but not fail-proof. Equally important are “no regrets” policies to release funding even knowing that the risk might not materialize;
• The private financial sector will not provide a new and significant source of finance for anticipatory action. Private financial institutions might, through loans or insurance, pre-pay activities when donors cannot. But ultimately the public sector will have to foot the bill; and
• Pre-arranged finance alone will not lead to early action. There need to be joint plans for actors with the best comparative advantage to implement the most relevant activities. There is a risk that anticipatory finance will simply end up funding the same humanitarian response system.

Anticipatory finance is unlikely to be effective without a common surveillance function—a gap in the current humanitarian architecture. This would help prioritize risks that require early action but also inform where finance should be rebalanced according to the severity of risk and need, rather than political considerations.

In protracted crises, more multi-year humanitarian finance (MYHF) needs to be pre-arranged to provide incentives for long-term, adaptive programmes. These programs could include building local capacities to take over from international agencies. Another false premise is that MYHF alone would enable such a change. In reality, the recent increase in MYHF has not translated into better-quality programming because genuine multi-year planning is still lacking. MYHF is still too often used to plug gaps rather than to enhance agility and adaptiveness. Some research respondents argued that the scale of MYHF (currently under 10 percent of the total humanitarian finance) has not yet reached the critical mass needed to incentivize change.

2. Pooling for outcomes

There is no central treasury function in the humanitarian system. Which crisis or organization receives funding is largely determined by political priorities and the fundraising capacity of agencies. This contributes to delays, but also a resourcing imbalance between similarly severe needs, even within the same country (e.g. the June-December 2019 Ebola response plan in the Democratic Republic of the Congo (DRC) was fully funded, in contrast to the country-wide humanitarian response plan which was 46 percent funded). It also reduces efficiency and effectiveness because money tends to flow to those organizations with the most successful—and expensive—fundraising capacity, rather than those with the greatest comparative advantage to achieve outcomes. Some informants suggested that the way the international humanitarian system is replenished needs a rethink, learning lessons from more efficient mechanisms such as the Global Fund to fights AIDS, Tuberculosis and Malaria, and Gavi, the Vaccine Alliance.

Pooled funds such as the CERF play both a contingency and balancing function, but their size is too small to transform the overall allocation model. Although UN pooled funds doubled between 2013 and 2018, their share of total funding only grew from 5.1 percent to 6.4 percent—a proportion unlikely to be transformational. In our research, participants estimated that they would need to reach a 15 percent threshold. Country-based pooled funds (CBPFs) have grown and improved their agility (on average CBPFs are twice as quick as bilateral grants), but inflexible UN systems remain a constraint. Most existing pooled funds, while they reduce transaction costs on the donor side, allocate funding through projectized grants to a narrow set of organisations, using the established appeals process, rather than looking for the best comparative advantage to deliver pre-agreed outcomes.

Finance should be a key incentive for the system to genuinely plan based on shared outcomes. However, donor incentives driven by accountability to taxpayers, parliaments, the media, and their institutional set-up, leads them to assume that it is best to focus resources on short-term, visible outputs. Outcomes-based programming has remained niche, focussed on humanitarian impact bonds, too small in scale to draw systemic lessons. Similarly, “Payment by Results” in the UK’s core funding to UN agencies has yet to produce conclusive evidence that the approach works. However, at the country level, evidence is emerging that large block grants against outcomes-based, multi-partner programs provide incentives for more strategic and adaptive planning, while maintaining low transaction costs and the ability to pool risks. Rather than pre-selecting partners, such grants can flexibly include those partners with the greatest comparative advantage, including local partners, and evolve with the context. Further experimentation with this approach at a larger scale is needed to identify what works best.

3. Financing functions, not end-to-end mandates

Humanitarian agencies have long argued that finance is most effective when provided to them unearmarked. However, evidence of the systemic benefits of unearmarked funding to specific agencies is limited. While this type of funding helps to maintain capacity for rapid response and to fill gaps, it is rarely used for longer-term, adaptive programs. When passed on to implementing partners, it is often in the form of short-term, projectized grants. Earmarking funding to specific organizations in this way could reinforce siloes and discourage collaboration to deliver collective outcomes.

The 2015 High-Level Panel on Humanitarian Cash Transfers first outlined the idea of separating the allocation of donor finance by function (e.g. normative work, coordination, needs analysis, targeting, delivery, monitoring and evaluation) rather than by organization. Such an approach would help deconflict interests, improve quality and accountability, and potentially reduce costs. Since then, attempts by some donors to finance the delivery of humanitarian cash transfers separately from needs analysis, targeting and monitoring have been met with resistance. UN agencies have coalesced to propose a common UN cash system where they commit to join-up delivery systems to reduce costs and improve the experience for beneficiaries. However, the new system does not address the issue of conflicted interests and accountability.

Budgeting the actual costs of assessing needs, targeting, monitoring and evaluation, and as other “core” functions specific to each agency, should become common practice to enable a comparison with their value-add.

There is an expectation that separating finance by function would lead to consolidation, i.e., a reduction in the budgets and operational footprint of some agencies. This would in turn reduce their ability to raise overheads for core functions, including maintaining much needed operational capacity. There is, however, no readily available evidence to make such a judgement objectively. The real costs of delivering humanitarian assistance—in the form of cash or other—have not been analysed in a transparent way. A more comprehensive appraisal of overheads is needed, and of how they are distributed along the delivery chain (through value-chain mapping exercises), compared with the costs necessary to maintain operational presence. Budgeting the actual costs of assessing needs, targeting, monitoring and evaluation, and as other “core” functions specific to each agency, should become common practice to enable a comparison with their value-add.

How to make change happen?

Throughout our research, informants agreed that a critical mass of finance allocated in new ways is necessary to effect systemic change. However, radically changing the behaviour of donors has traditionally been difficult. Limiting factors are not constrained to a lack of evidence: outlining clear evidence of the benefits of anticipatory action for instance has not led to a significant change in donor behaviour. There is an assumption that the political narrative in support of humanitarian aid relies on the system maintaining the status quo, and that the perceived risks of doing things differently (e.g., pre-arranging finance for events that might not occur or delegating the allocation of resources to pooled funds) could undermine public support. Internal inertia in donor bureaucracies was also flagged as an impediment to reforms: commitments made at the political or senior-official level are sometimes actively resisted by middle management.

Past reform agendas were drawn in reaction to highly visible failures by the system to respond to large-scale disasters. A more proactive approach would include:

• Reframing the narrative in donor countries, in support of new ways to finance the system, not only within governmental aid agencies but also with treasuries, parliaments and the media;
• Mobilizing political champions who are on board with the proposed direction of travel and are willing to bring others in. Change will require political courage and leadership more than technical fixes;
• Building coalitions: at least a few of the main donors willing to change their practice in the same will be essential, but at least some agencies within the sector also must be willing to change the way they operate. Allies outside the sector, for example, in the scientific community, would be useful;
• Incremental radicalism: part of the challenge facing the Grand Bargain is its level of ambition—getting many diverse actors to make comprehensive changes at the global level. Implementing more radical changes across the system but in a limited number of pilot countries could be more effective in generating proof of concept; and
• Investing in change: changing the way the system plans and programs funds requires skills and capabilities (e.g. in multi-year, adaptive programming, anticipation) that are scant in the system and will require investment from donors.

The Grand Bargain has been extended until 2021, when the process will have run for five years.  It will be an obvious time to take stock of real progress and to consider the future of humanitarian reform. Such a review will not be complete without looking at options for more radical changes to the humanitarian business model. The proposals above, part of CGD’s broader work on humanitarian reform, aim to start this conversation.