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Follow the money: are funding patterns keeping pace with trends and evidence?

The nature of humanitarian assistance has changed dramatically since the cold war. It has gone through exponential growth, becoming an industry valued at nearly US$20 billion. This growth of investment in crises response and development has facilitated increasingly sophisticated mechanisms for crises prevention and mitigation, and rapid response.

Nevertheless, the humanitarian community frequently comes under intense scrutiny and criticism of spending and the distribution of funds. Chapter 4 looks at the current mechanisms for funding humanitarian response and disaster risk management initiatives, pulling apart the disparity between funds donated to international actors and funds that directly reach disaster affected states and local actors on the ground.

International humanitarian response has long espoused the need to respect, support and strengthen the capacities of local and national responding actors, both government and non-government alike, through finance and investment. Yet in keeping with one of the dominant themes throughout the World Disasters Report 2015, these aspirations diverge significantly from operational realities—just 3% of international funding is channeled directly to affected states, and a mere 1.6% to local NGOs.

If international aid agencies and donors are so constantly criticized for this disparity, why have more concrete steps to rebalance investment not been taken? Chapter 4 finds that there are a number of principled, pragmatic and political reasons that the proportion of reported international humanitarian assistance directed to affected governments and local NGOs remains so small.

Many Western donors are constrained from providing humanitarian assistance directly to affected states due to concerns around that funds will not be used for the intended purpose, that they may not be adequately accounted for, or that value-for-money objectives will not be achieved. The need to ensure impartial humanitarian response is also a key concern. Increasingly stringent rules to manage the risks of corruption, bribery, money laundering, fraud and terrorism financing have meant funding opportunities have narrowed and that there is a growing conservatism and caution among international organizations.

The majority of international humanitarian funds are mediated by international actors. Although the majority of funds are channeled to international actors, funds are then channeled to states and local actors through partnership and sub-contracting. A lack of transparency and evidence around scale, cost-efficiency and value-added of mediated funding contributes to the increasingly frequent call to cut out the middle-man. However, international mediators of funding provide a number of important functions, which address current challenges to direct funding.

Within the current framework of international funding ‘middle-man’, can provide necessary solutions to the very real and crises specific challenges of ensuring the flow of resources. The advantages of mediated funds include:

Taking responsibility for risk—international mediating actors provide a useful service for donors in assuming the transaction costs associated with managing numerous partnerships at the affected-country level, as well as taking on legal and fiduciary risk.

Capacitystrengthening—partnerships between international and local actors provide the opportunity for technical support and training, including building the institutional procedures and capacity necessary to navigate the many quality and accountability requirements of international donors.

Networks and influence—associating with an internationally recognized humanitarian brand may also help to lend credibility and visibility to local partners. The largest international agencies are highly successful lobbyists and fundraisers, and able to adapt to service the changing compliance requirements and policy priorities of donors.

Nevertheless, a collective re-think by the humanitarian community, donors and governments on how to rebalance investment will ensure that local and national actors are better positioned to instigate disaster risk reduction and lead on response wherever possible. Chapter 4 argues that the challenges of direct funding must not be promoted as justification for international mediators. Frameworks must be adapted and solutions found to ensure local and national actors have greater authority and agency.

The financing architecture—its systems, standards and cultures—must adapt to the changing realities of who is best placed to respond. For all the possible benefits of international partnerships, in reality, international actors are often in direct competition with national actors, yet the odds of receiving funding remain heavily stacked in favour of international actors. Local NGOs and civil society actors are well-positioned and physically proximate to crisis-affected communities and are able to respond where international actors cannot reach. In highly insecure settings, like Iraq, Somalia and Syria, overwhelmingly, local NGOs and civil society actors carry out front-line humanitarian response. Despite this, direct international funding to these actors has reduced over the past five years.

There are a number of new finance developments within the humanitarian assistance and development, which are effectively cutting out the ‘middle-man’. Increasingly, multilateral development banks are providing governments with direct access to post-disaster finance and technical support to put in place financial preparedness measures against the cost of the reconstruction and recovery elements of crisis response. These innovations demonstrate clearly to international aid agencies and donors that to remain relevant funding mechanisms will need to adapt.

As the humanitarian community looks to the 2030 agenda for sustainable development—a new era of humanitarian ambition, we must also look at how action toward achieving the sustainability development goals will be achieved. And that undoubtedly is adequate investment in the appropriate actors. Resources must be driven to the state and community level, where humanitarian needs are the greatest and development impacts are felt the most.

What value the middleman?

The volumes of funds received directly by local and national NGOs does not represent the whole picture, and in fact the majority of international humanitarian funds are mediated by international actors.

In 2013, for example, of the US$ 1.2 billion UNHCR passed on to implementing partners, a third was channelled to local NGOs. A lack of transparency around mediated funding contributes to frequently voiced arguments for ‘cutting out the middleman’.

In accepting grants which are intended for local partners, international actors provide a useful service for donors in assuming transaction costs associated with managing numerous partnerships at country level, as well as taking on legal and fiduciary risks.

In addition to the administrative work of identifying partners, funding mediators take on responsibility for the risks associated with contracting funds to front-line responders, significantly increasing their own exposure to corporate risk. This includes being liable for legal proceedings, possible funding sanctions, and reputational risk if partners mismanage funds.

In some cases, international fund mediators have been obliged to pay back funds when diversion or fraud has been confirmed, even when those funds could not be recovered from the third-party. Organizations or their staff may be liable for criminal prosecution under donors’ counter-terrorism financing rules.

In highly insecure humanitarian crises, such as Somalia, Syria and parts of Afghanistan and Pakistan, access is limited and exposure to risk is high, yet there may be little alternative in order to access crisis-affected populations than to support local partners. Therefore accepting and reducing risk is an essential service requiring considerable investments by international fund mediators.

International partners may also provide a range of less easily quantifiable benefits to local partners, including informal technical help and support for advocacy, as well as access to international resources through their networks which local actors could not achieve alone.

In many cases one of the longer-term goals of capacity-building investments is to support organizations toward financial independence.

Association with an internationally recognized humanitarian brand may also help to lend credibility and visibility to local partners.

There is little scrutiny applied to the terms and quality of internationally mediated financing relationships. Of US$ 235 million of CERF funds on which UN partners reported in 2014, 82 per cent was retained by the first-level recipient and US$ 51 million passed to implementing partners.

There are few indications of cost efficiency of mediated funding. In the case of country-based funds managed by OCHA, however, it deducts around 5 per cent of donor contributions to cover managing the funds; where UNDP serves as administrative agent to disburse funds to NGOs, they charge 7 per cent.

From the perspective of donors, such mediated funding is more cost-effective than five or six donor contributors to a country-based pooled fund, establishing the capacity to identify partners and projects in a crisis country.

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World Disasters Report - Chapter 4