Financing growing humanitarian and development needs
At the time of reduced public budgets and support for aid, the humanitarian sector faces increasing challenges in finding consistent sources of revenue to meet growing needs. Even as Overseas Development Assistance (ODA) is stagnating, UN estimates suggest that developing countries will need more than $2.5 trillion a year to achieve the SDGs by 2030 and that the vast majority of these funds must come from non-governmental sources. Moreover, as observed by the UN’s High-Level Panel on Humanitarian Financing, the gap between the urgent needs from immediate humanitarian crises is already outpacing available financing to the tune of $15 billion, and those needs are only likely to rise in an era of climate change, political instability, and increasing intra and inter-state confrontation. Strategically mobilizing diverse sources of financing for social purposes will be critical to cover the gap between public funding and humanitarian and development needs.
Governments in traditional donor countries face growing pressures against aid spending, including stagnating or reversing growth, the pressures of ageing populations leaving the workforce and requiring support, rising anti-globalist sentiments in their electorates, and declining public trust and confidence in institutions, including charities. At the same time, donors – be it government, philanthropy, corporate or individual – are increasingly demanding evidence that aid programs and services are making a difference. This expectation to deliver more impactful services is fuelling competition into aid and development markets.
There is an emergence of a number of new financing models, unique in terms of their market size, their operations and the way they serve those in developing countries. They range from equity-based crowdfunding campaigns and peer-to-peer fundraising to smart remittances, impact investment (such as payment-by-results contracts, outcomes-focused grants, shared value, debt and equity financing, social impact bonds) and mobile money, which can provide a part of the solution to address a financing gap. Instruments such as Islamic Finance assets globally estimated at 2.5 trillion annually are playing major roles. FinTech applications, such as Blockchain and cryptocurrencies, are disrupting traditional finance players, rewriting services, reducing transaction costs and offering more to the under-banked – people or organizations who do not have sufficient access to mainstream financial services and credit. These models are projected to unlock private capital and help further leverage public funding to mobilize various new sources of investment for public policy, social services and development goals.
The size of these alternative financing instruments dwarfs current ODA and humanitarian financing. Impact investments alone are estimated to exceed 1 trillion dollars annually, experimentation with these models will be essential, however they will require a substantial shift that may be challenging to execute; significantly greater focus on efficiency, accountability, evidence that can prove impact and advanced data capability, along with an acceptance of the mechanisms of new funding flows that may contravene current policy and practice in the RCRC, such as direct giving and global crowdfunding across multiple markets.
The financing environment will be far less tolerant of duplication and waste. There will be increasing pressure to cut out the middle men, reduce layers of administration and ‘Northern based’ oversight. Current practice, which often involves multiple arms of the Movement operating in the same country all with parallel and deep structures, may need to be reformed and in time we may see increased efficiency imposed as conditionality.
What are the possibilities?
Efficiencies of scale will be increasingly important which while difficult for many NGOs can be achieved within the RCRC network but will require new operating models and greater coordination and collaboration. The potential for scale will also be attractive to financiers from new sources of financing as will the respectability of the brand and the legitimacy it offers in ensuring that impact of financing is achieved at scale.
Considerations for the Red Cross and Red Crescent
- How do we anticipate the likely financial architecture of the humanitarian sector in the coming years? How do we lay the foundation for and lead in experimenting and mobilizing alternate sources of capital? Do we, as a network, have the risk appetite necessary to engage with them?
- How might our practices in the collection of data, delivery of services, finance controls and measurement of impact need to change in order to effectively benefit from innovative finance?
- What new partnerships are needed and new models need to be conceived to unlock alternate sources of capital and support?